AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON
September 4, 2001 Registration No.:333-62226
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
Amendment No. 2 to
FORM SB-2
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
SCIENCE DYNAMICS CORPORATION
(EXACT NAME OF SMALL BUSINESS ISSUER AS SPECIFIED IN ITS CHARTER)
----------------------------------------------------------
Delaware 3661 22-2011859
(State or jurisdiction (Primary standard (I.R.S. Employer
of incorporation) industrial Identification Number)
classification
code number)
1919 Springdale Road, Cherry Hill, New Jersey, 08003
(856) 424-0068
(ADDRESS AND TELEPHONE NUMBER OF PRINCIPAL EXECUTIVE OFFICES AND
PRINCIPAL PLACE OF BUSINESS)
Joy C. Hartman, President
1919 Springdale Road, Cherry Hill, New Jersey, 08003
(856) 424-0068
(ADDRESS AND TELEPHONE NUMBER OF AGENT FOR SERVICE)
Copies to:
Gregory Sichenzia, Esq.
Thomas A. Rose, Esq.
Sichenzia, Ross, Friedman & Ference LLP
135 W. 50th Street
New York, New York 10020
Phone (212) 664-1200, Fax (212) 664-7329
Approximate date of proposed sale to the public: From time to time as
the selling shareholders may decide.
If any securities being registered on this Form are to be offered on a
delayed or continuous basis pursuant to Rule 415 under the Securities
Act of 1933, other than securities offered only in connection with
dividend or interest reinvestment plans, check the following box: [X]
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the
following box and list the Securities Act registration statement number
of the earlier effective registration statement for the same offering.
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the
Securities Act registration statement number of the earlier effective
registration statement for the same offering.
If this Form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act, check the following box and list the
Securities Act registration statement number of the earlier effective
registration statement for the same offering.
If the delivery of the prospectus is expected to be made pursuant to
Rule 434, please check the following box.
Calculation of Registration Fee
- ------------------------------------------------------------------------------
Title of each Amount of Proposed Maximum Proposed Maximum Amount of
Class of shares to be Offering price Aggregate Offering Registration
securities to Registered per Share Price (1) Fee
be registered
- ------------------------------------------------------------------------------
Common stock, 2,941,176 $0.81 (1) $ 2,382,353 (1) $596
par value
$.01 per
share
- ------------------------------------------------------------------------------
Common stock, 872,727 $0.81 $706,909 $177
par value $.01
per share
issuable upon
exercise of
warrants
- ------------------------------------------------------------------------------
Total 3,813,903 $773
1. Based on the closing bid price of the common stock on June 1, 2001.
The registrant hereby amends this registration statement on such date or dates
as may be necessary to delay its effective date until the registrant shall
file a further amendment which specifically states that this registration
statement shall thereafter become effective in accordance with Section 8(a) of
the Securities Act of 1933 or until the registration statement shall become
effective on such date as the Commission, acting pursuant to said Section
8(a), may determine.
Prospectus
SCIENCE DYNAMICS CORPORATION
3,813,903 shares of common shares
Up to 3,813,903 shares of our common stock are being offered by the
security holders named in this prospectus. We will not receive any of the
proceeds from the sale of common stock by the security holders. However, we
may receive amounts upon exercise of outstanding warrants.
Our common stock is traded in the Over-The-Counter Electronic Bulletin
Board under the symbol "SIDY". On August 29, 2001 the closing price of our
common stock was $.20 per share .
Please see "Risk Factors" beginning on page 5 to read about factors you
should consider before buying shares of our common stock.
Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved of these securities or determined if
this prospectus is truthful or complete. Any representation to the contrary
is a criminal offense.
The date of this prospectus is __________, 2001
TABLE OF CONTENTS
Prospectus Summary 3
Summary Financial Data 4
Risk Factors 5
The Offering 9
Use of Proceeds 10
Dividend Policy 11
Management's Discussion and Analysis of Financial Condition
and Results of Operations 12
Business 19
Management 30
Certain Transactions 35
Principal Security Holders 36
Description of Securities 38
Selling Shareholder 40
Plan of Distribution 41
Legal Matters 43
Experts 43
How to Get More Information 43
Financial Statements F-1
- -2-
PROSPECTUS SUMMARY
You should read the following summary together with more detailed information
and our combined financial statements and the notes to those statements
appearing elsewhere in this prospectus.
Our Business
Science Dynamics Corporation has developed, designed and marketed a variety of
hardware oriented, telecommunications equipment over the past 23 years. We
primarily develop and market hardware and software products and applications
for the telecommunications industry that use third party hardware.
Today we focus on three primary product lines:
- - Commander Inmate Telephone Control System - originally designed in
1986, this system provides timing and call control for collect phone
calls made by inmates from U.S. correctional institutions.
- - Integrator Series of IP Gateways - commonly referred to as Voice over
Internet Protocol or IP Telephony. IP Telephony refers to communication
services - voice, facsimile, and/or voice messaging applications - that
are transported via the Internet, rather than the traditional telephone
network.
- - VFX-250S Video over Frame Relay device - a hardware based device
designed to upgrade Frame Relay Networks to handle video conferencing
applications in addition to their traditional data requirements. The
VFX establishes the first ever means of transporting continuous data
bit streams over Frame Relay. A Frame relay is a packet switching
protocol. Data packets, referred to as frames, are routed to
different destinations dependent on header (address) information.
Our Offices
Our executive offices are located at 1919 Springdale Road, Cherry Hill, New
Jersey, 08003, our telephone number is (856) 424-0068; and our web site can
be accessed at www.scidyn.com. Information contained in our web site is not
part of this prospectus.
The Offering Summary
- ----------------------------------------------------------------------------
Total shares of common stock
outstanding as of May 31, 2001 17,657,901
- ----------------------------------------------------------------------------
Common stock offered for sale by Up to 3,813,903 shares, assuming
the selling shareholders the issuance of all of the
shares registered in connection
with the convertible notes and
exercise of all warrants by the
selling shareholders.
- ----------------------------------------------------------------------------
Use of Proceeds We will not receive any of the
proceeds of the shares offered by
the selling shareholder. Any
proceeds we receive from our
sales of common stock upon the
exercise of warrants will be used
for working capital and other
general corporate purposes.
- ----------------------------------------------------------------------------
OTC BB Symbol "SIDY"
- ----------------------------------------------------------------------------
- -3-
Summary Financial Data
You should read the following summary financial data together with the section
of this prospectus entitled "Management's Discussion and Analysis of Financial
Condition and Results of Operations" and our financial statements and notes
thereto included elsewhere in this prospectus.
Year Ended Six Months Ended
December 31, June 30,
2000 1999 2001 2000
---- ---- ---- ----
Statement of operations
data:
Revenues $5,269,377 $2,347,984 $372,614 $3,547,753
Cost of revenues 1,891,484 1,330,886 288,526 1,284,270
Gross margin 3,377,893 1,017,098 84,088 2,263,483
Selling, general and
administrative 4,747,424 3,059,765 1,839,340 1,408,305
Income (loss) from
operations (1,369,531) (2,042,667) (2,510,042) 328,644
Interest expense,
net of interest
income 30,269 (12,219) (225,886) 8,438
Net (loss) (1,339,262) (2,054,886) (2,735,928) 337,082
Basic and diluted
earnings (loss) per
share $(0.08) $(0.12) $(0.15) $0.02
Shares used in basic and
diluted earnings
(loss) per share 17,549,993 16,777,070 17,783,710 16,777,070
As of As of
December June
31, 2000 30,2001
---------- ----------
Balance sheet data:
Total working capital
(deficit) $ 1,142,948 $ (218,682)
Total assets $ 3,008,152 $ 1,646,019
Total liabilities $ 662,890 $ 2,005,452
Total stockholders'
equity (deficit) $ 2,345,262 $ (359,833)
- -4-
RISK FACTORS
An investment in our common stock involves a high degree of risk. You
should carefully consider the following risk factors before investing in our
common stock.
We have a history of losses which may continue, requiring us to seek
additional sources of capital which may not be available, requiring us to
curtail or cease operations.
We incurred net losses of $1,339,262 for the year ended December 31, 2000
and $2,054,886 for the year ended December 31, 1999. For the six months
ended June 30, 2001, we incurred a net loss of $2,735,928. We cannot
assure you that we can achieve or sustain profitability on a quarterly or
annual basis in the future. If revenues grow more slowly than we anticipate,
or if operating expenses exceed our expectations or cannot be adjusted
accordingly, we will continue to incur losses. In addition, we will require
additional funds to sustain and expand our sales and marketing activities,
research and development, and our strategic alliances, particularly if a
well-financed competitor emerges or if there is a rapid technological shift in
the telecommunications industry. We anticipate that we will require up to
approximately $1,600,000 to fund our continued operations for the next twelve
months, depending on revenue from operations. There can be no assurance that
financing will be available in amounts or on terms acceptable to us, if at
all. The inability to obtain sufficient funds from operations or external
sources would require us to curtail or cease operations.
We operate in highly competitive markets and may not be able to compete
effectively, which could result in additional losses.
Our products are sold in several different markets, and our competition
varies greatly by product line. We compete directly against several other
suppliers of inmate call processing systems. Some of these competitors'
systems have features which our inmate call processing system does not have.
These include advanced technical features such as speaker identification or
"voice print" technology to use an inmate's voice to uniquely identify them
instead of having them enter a touch-tone Personal Identification Number
(PIN). We are currently evaluating several technology partners to integrate
this technology into our inmate call processing system. In addition our
inmate call processing systems do not currently work with coin-operated public
phones which are found on a limited basis at our customer locations.
We do not compete with any other company in the video over Frame Relay
market. Traditionally, video conferencing has been done using ISDN or leased
line connections. Frame Relay has been in existence for several years, and is
now the most widely deployed data transmission means in the world. The
significance of our technology is the new and innovative ability to take
standard videoconferencing, "packetize it" and route it over a Frame Relay
network. To date, we are not aware of any other video over frame relay
products which perform this function.
Our Internet products compete in a marketplace that is populated by
larger companies who have significantly more resources for development,
marketing and deployment. We may not be able to compete successfully against
current or future competitors, and competitive pressures could significantly
harm us, resulting in more significant financial losses.
We depend on a limited number of suppliers for certain parts, the loss of
which could result in production delays and additional expenses.
Although most of the parts used in our products are available from a
number of different suppliers on an off-the-shelf basis, however, certain
parts are available from only one supplier, specifically, certain circuit
boards from Natural Micro Systems. If Natural Micro Systems were unable
to deliver certain key components, it could take us from three to six months
to port our software to a suitable alternative board. We are in the process
of evaluating other vendors for these key components to help mitigate this
risk. The substitute part may require a hardware or software change in the
unit in order to provide satisfactory performance, adding costs and delays.
- -5-
A customer which accounted for 83% of our sales in 2000 was placed into
receivership and future sales to this customer are unlikely. Another
customer accounting for 15% of our 2000 sales will also discontinue
purchases. It is common that a very small number of customers will account
for a high percentage of our revenue, therefore the loss of a major customer
would significantly decrease our revenues and increase our losses.
A small number of customers account for a significant portion of our
revenue. If we lose existing customers and do not replace them with new
customers, our revenue will decrease and may not be sufficient to cover our
costs. During 2000, two customers accounted for 83% and 15% of total sales.
During 1999, three customers and their operating subsidiaries accounted for
64%, 10% and 10% of total sales. The customer accounting for 83% of total
2000 sales was Cascadent Communications, with whom we had a supply agreement.
Our former president, chief executive officer and chairman of the board, Alan
Bashforth, became president of Cascadent subsequent to his service as an
officer of Science Dynamics. Mr. Bashforth continues to serve as a member of
our board of directors. The agreement was terminated on January 4, 2001,
upon receiving notice that Cascadent was placed into receivership. In a
letter dated June 25, 2001, the Cascadent receiver advised that it was not
possible to achieve a sale of Cascadent's business on a going concern basis.
The letter also stated that it appears that there will be insufficient funds
available for a liquidator to be appointed in this matter. Bell South
Communications, which accounted for 15% of our sales in 2000, recently
announced that it was withdrawing from the public phone market, so future
sales to Bell South are unlikely.
The loss of such major customers severely impacts our operations.
Although we actively seek new customers, the recent losses have resulted in
significant financial losses. If we are unable to attract and maintain a new
customer base, we will be required to continue to curtail or cease operations.
Changes in government telecommunications regulations could reduce demand for
our products, resulting in reduced revenues.
For our Integrator product lines, our customers are subject to varying
degrees of domestic and foreign, federal, state, and local regulation.
Regulatory actions have affected, and are likely to continue to affect, both
our customers and us. Regulatory actions may cause changes in the manner in
which our customers or we conduct business. The products that we develop must
comply with standards established by the Federal Communications Commission and
other international standards bodies. A change in these standards requiring a
modification of our products could result in additional unanticipated expenses
and a delay in the delivery of our products.
If our products and services fail to perform or perform improperly, revenues
and results of operations could be adversely affected and we could be subject
to legal action to recover losses incurred by our customers.
Products as complex as ours may contain undetected errors or "bugs",
which result in product failures or security breaches or otherwise fail to
perform in accordance with customer expectations. Any failure of our systems
could result in a claim for substantial damages against us, regardless of our
responsibility for the failure. Although we maintain general liability
insurance, including coverage for errors and omissions, there can be no
assurance that our existing coverage will continue to be available on
reasonable terms or will be available in amounts sufficient to cover one or
more large claims, or that the insurer will not disclaim coverage as to any
future claim. The occurrence of errors could result in loss of data to us or
our customers which could cause a loss of revenue, failure to achieve
acceptance, diversion of development resources, injury to our reputation, or
damages to our efforts to build brand awareness, any of which could have a
material adverse affect on our market share, revenues and, in turn, our
operating results.
- -6-
Changes in technology and our ability to enhance our existing products,
including research and development, will require technical and financial
resources, the unavailability of which may hinder sales of our products and
result in decreased revenues.
The markets for our products, especially the telecommunications industry,
change rapidly because of technological innovation, changes in customer
requirements, declining prices, and evolving industry standards, among other
factors. To be competitive, we must develop and introduce product enhancements
and new products, which increase our customers' and our ability to increase
market share in the corrections industry. New products and new technology
often render existing information services or technology infrastructure
obsolete, excessively costly, or otherwise unmarketable. As a result, our
success depends on our ability to timely innovate and integrate new
technologies into our current products and services and to develop new
products. In addition, as the telecommunications networks are modernized and
evolve from analog-based to digital-based systems, certain features offered by
us may diminish in value. Moreover, regulatory actions affecting the
telecommunications industry may require significant upgrades to our current
technology or may render our service offerings obsolete or commercially
unattractive. We cannot guarantee that we will have sufficient technical,
managerial or financial resources to develop or acquire new technology or to
introduce new services or products that would meet our customers needs in a
timely manner.
Our common stock was recently delisted from the Nasdaq Stock Market ; our
common stock now trades on the Over-The-Counter Electronic Bulletin Board and
is treated as a "penny stock", which may negatively impact its price and make
it more difficult to dispose of.
On August 24, 2001, our common stock was delisted from trading on The
Nasdaq Stock Market for failure to comply with the net tangible asset and
minimum bid requirements. Our common stock now trades on the Over-The-Counter
Electronic Bulletin Board. In the absence of at least $5,000,000 of net
tangible assets or a stock price in excess of $5.00 per share, trading in our
common stock is subject to Rule 15c2-6 and Rules 15g-2 through 15g-9 under
the Securities Exchange Act of 1934, requiring additional pricing and
compensation disclosures to be made to customers. These rules require, among
other things, that any broker engaging in a transaction in our securities
provide its customers with a risk disclosure document, disclosure of market
quotations, if any, disclosure of the compensation of the broker and its
salespersons in the transaction, and monthly account statements showing the
market values of our securities held in the customer's accounts. The brokers
must provide bid and offer quotations and compensation information before
making any purchase or sale of a penny stock and also provide this information
in the customer's confirmation. Generally, brokers may be less willing to
execute transactions in securities subject to the "penny stock" rules. This
may make it more difficult for investors to dispose of our common stock and
cause a decline in the market value of our stock.
If we are required for any reason to repay the $1,200,000 of convertible
debentures we issued in May 2001, we would be required to deplete our working
capital, if available, or raise additional funds. Our failure to repay the
convertible notes, if required, could result in legal action against us which
could require the sale of substantial assets.
In May 2001, we issued $1,200,000 principal amount of convertible
debentures. The convertible debentures are due and payable, with 8% interest,
in May 2003, unless sooner converted into shares of our common stock. In
addition, any event of default as described in the convertible notes could
require the early repayment of the convertible notes, including a premium of
30% of the outstanding principal balance of the note at the time of the
- -7-
default. We anticipate that the full amount of the convertible notes,
together with accrued interest, will be converted into shares of our common
stock, in accordance with the terms of the convertible notes. If we are
required to repay the convertible notes, we would be required to use our
limited working capital and raise additional funds. If we were unable to
repay the notes when required, the note holders could commence legal action
against us to recover the amounts due which ultimately could require the
disposition of some or all of our assets. Any such action would require us to
curtail or cease operations.
The continuously adjustable conversion price feature of our $1,200,000
principal amount convertible notes may encourage the note holders to make
short sales of our common stock, which could have a depressive effect on the
price of our common stock and could require us to issue a substantially
greater number of shares.
The convertible notes which we issued in May 2001 are convertible into
shares of our common stock at a 15% discount to the trading price of the
common stock either prior to the issuance of the notes or prior to the
conversion, whichever is lower. The conversion feature may encourage the note
holders to make short sales of the common stock prior to their conversions.
Such sales could significantly depress the price of the common stock, allowing
the note holders to convert into a substantially larger number of shares of
common stock. For instance, if the price of our common stock was $.40 per
share, we would be obligated to issue 3,529,411 shares. If the price of our
common stock fell to $.10, we would be obligated to issue 14,117,647 shares.
Our obligation to issue shares upon conversion is essentially limitless.
Our commitments to issue additional common stock may dilute the value of your
stockholdings, adversely affect the market price of our common stock and
impair our ability to raise capital.
We currently have outstanding commitments in the form of convertible notes
and warrants to issue a substantial number of new shares of our common stock.
The shares subject to these issuance commitments are included in this
prospectus and thus will be freely tradable. Furthermore, the number of
shares issuable upon conversion of these securities is subject to adjustment,
depending on the market price of our common stock. To the extent that the
price of our common stock decreases, we will be required to issue additional
shares upon conversion. There is essentially no limit to the number of shares
that we may be required to issue. An increase in the number of shares of our
common stock that will become available for sale in the public market may
adversely affect the market price of our common stock and, as a result, could
impair our ability to raise additional capital through the sale of our equity
securities or convertible securities.
CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS
This prospectus contains forward-looking statements. These
forward-looking statements are not historical facts, but rather are based on
our current expectations, estimates and projections about our industry, our
beliefs and assumptions. Words including "may," "could," "would," "will,"
"anticipates," "expects," "intends," "plans," "projects," "believes," "seeks,"
"estimates" and similar expressions are intended to identify forward-looking
statements. These statements are not guarantees of future performance and are
subject to certain risks, uncertainties and other factors, some of which are
beyond our control, are difficult to predict and could cause actual results to
differ materially from those expressed or forecasted in the forward-looking
statements. These risks and uncertainties are described in "Risk Factors" and
elsewhere in this prospectus.
- -8-
We caution you not to place undue reliance on these forward-looking
statements, which reflect our management's view only as of the date of this
prospectus. We are not obligated to update these statements or publicly
release the result of any revisions to them to reflect events or circumstances
after the date of this prospectus or to reflect the occurrence of
unanticipated events.
THE OFFERING
In this prospectus, we are registering 2,941,176 shares of common stock
underlying $1,200,000 of 8% convertible debentures, due May 22, 2003, issued
to three investors pursuant to a Subscription Agreement dated May 22, 2001.
Interest only payments are due quarterly commencing September 30, 2001, and
the principal is due in one lump sum on May 22, 2003, or upon certain events
of default.
The conversion price for the convertible debentures is the lesser of 85% of
the average of the three lowest closing prices for the common stock for the 30
trading days prior to but not including May 22, 2001, or 85% percent of the
average of the three lowest closing prices for the common stock for the 30
trading days prior to but not including the conversion date. The maximum
number of shares of common stock that any subscriber or group of affiliated
subscribers may own after conversion at any given time is 4.99%. The number
of shares of common stock issuable upon conversion of the convertible
debentures is 1,470,588, based on a conversion price of $0.816 per share. We
are required to register 200% of this amount, for a total of 2,941,176
shares. The actual conversion price will depend on the market price of our
common stock prior to the conversion. In addition, 872,727 shares underlying
warrants are being registered. These warrants, which expire May 22, 2006,
have an exercise price of $1.4339 per share.
The parties have made mutually agreeable standard representations and
warranties. We have also entered into certain covenants including, but not
limited to, the following:
- - we may not redeem the convertible debentures without the consent of the
holder;
- - we will pay to certain finders a cash fee of 8% of the principal amount
of the convertible debentures for location of the financings; and
- - we have agreed to incur certain penalties for untimely delivery of the
shares.
Upon any event of default, including the failure to register or deliver shares
of common stock in a timely manner upon conversion, the note holders can
require us to immediately pay a sum equal to 130% of the unconverted principal
amount of the notes, together with accrued but unpaid interest.
In connection with the sale of the convertible debentures,
Laurus Capital Management LLC and Keshet Management Limited received an
aggregate of $96,000 as payment for their services as finders. In addition,
they will receive an aggregate of 8% of the proceeds upon the exercise of the
warrantsissued to the investors.
- -9-
USE OF PROCEEDS
We will not receive any proceeds from the resale of shares of common
stock by the selling stockholders. However, we will receive the sale price
of any common stock we sell to the selling stockholders upon exercise of the
warrants. We expect to use the proceeds of any such sales for general working
capital purposes.
PRICE RANGE OF COMMON STOCK
On August 24, 2001, our common stock was delisted from trading on The
Nasdaq Stock Market for failure to comply with the net tangible asset and
minimum bid requirements. Our common stock now trades on the Over-The-Counter
Electronic Bulletin Board. In the absence of at least $5,000,000 of net
tangible assets or a stock price in excess of $5.00 per share, trading in our
common stock is subject to Rule 15c2-6 and Rules 15g-2 through 15g-9 under
the Securities Exchange Act of 1934.
Our common shares are subject to the "penny stock" rules that impose
additional sales practice requirements should because our common shares are
below $5.00 per share. For transactions covered by these rules, the
broker-dealer must make a special suitability determination for the purchase
of the common shares and must have received the purchaser's written consent to
the transaction prior to the purchase. The "penny stock" rules also require
the delivery, prior to the transaction, of a risk disclosure document mandated
by the Securities and Exchange Commission relating to the penny stock market.
The broker-dealer must also disclose:
- the commission payable to both the broker-dealer and the registered
representative,
- current quotations for the securities, and
- if the broker-dealer is the sole market maker, the broker-dealer must
disclose this fact and the broker-dealer's presumed control over the
market.
Finally, monthly statements must be sent disclosing recent price
information for the penny stock held in the account and information on the
limited market in penny stocks. These rules apply to sales by broker-dealers
to persons other than established customers and accredited investors
(generally those with assets in excess of $1,000,000 or annual income
exceeding $200,000, or $300,000 together with their spouse), unless our common
shares trade above $5.00 per share. Consequently, the "penny stock" rules may
restrict the ability of broker-dealers to sell our common shares, and may
affect the ability to sell the common shares in the secondary market as well
as the price at which such sales can be made. Also, some brokerage firms will
decide not to effect transactions in "penny stocks" and it is unlikely that
any bank or financial institution will accept "penny stock" as collateral.
The following table shows for the periods indicated the high and low bid
quotations for our common stock as reported by one of our market makers.
These quotations are believed to represent inter-dealer quotations without
adjustment for retail mark-up, mark-down or commissions, and may not represent
actual transactions.
- -10-
HIGH BID LOW BID
-------- -------
FISCAL 1999
First Quarter $ 0.75 $0.44
Second Quarter $ 0.88 $0.71
Third Quarter $ 1.21 $0.92
Fourth Quarter $ 4.85 $2.50
FISCAL 2000
First Quarter $19.92 $9.92
Second Quarter $13.58 $7.60
Third Quarter $10.83 $7.40
Fourth Quarter $ 6.90 $3.00
FISCAL 2001
First Quarter $ 1.96 $1.24
Second Quarter $ 1.32 $0.16
As of June 30, 2001, there were approximately 350 holders of record of
our 17,657,901 outstanding shares of common stock. However, we believe that
there are more than 850 shareholders because of stock held in street name by
various broker-dealers.
DIVIDEND POLICY
We have never declared or paid any cash or stock dividends on our capital
stock. We presently intend to reinvest earnings to fund the development and
expansion of our business and, therefore, do not anticipate paying cash
dividends on our common stock in the foreseeable future. The declaration of
dividends will be at the discretion of our board of directors and will depend
upon our earnings, capital requirements and financial position, general
economic conditions and other pertinent factors.
- -11-
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following management's discussion and analysis of the financial
condition and results of operations should be read in conjunction with our
financial statements and the accompanying notes appearing elsewhere in this
prospectus. In addition to historical information, this management discussion
and analysis of financial condition and results of operations contain
forward-looking statements. Our actual results could differ materially from
those anticipated in the forward-looking statements as a result of factors,
including those set forth under "Risk Factors" and in other parts of this
prospectus.
Overview
In 1998, management made a strategic decision to divert most of our
development efforts towards the IP system. Advances in public and private
IP-based networks now enable businesses to use the Internet Protocol to
by-pass the Public Switched Telephone Network for national and international
long distance voice, fax, and video communications.
We continue to gain knowledge and experience in enhancing the development
of the system for IP Telephony. We have revised our development and
implementation of the products according to the direction of the marketplace.
Management believes that the penetration of the IP Telephony market along with
renewed interest and development in the Commander II call control series will
provide significant growth potential.
During the year, we changed the size and structure of our sales force.
The sales team has increased from two UK based sales people in 1999 to a
10-person team (8 in the US and 2 in the UK) led by our new Vice President of
Sales and Marketing. This team was fully in place by October 2000. Given
typical sales lead times and the current state of the Telco market, we do not
anticipate significant revenues to be generated by the new team until the
second half of 2001.
Our net sales results for the year ended December 31, 2000 were
$5,269,377, an increase of $2,921,393 from sales of $2,347,984 for the year
ended December 31, 1999. Our revenue in 2000 was predominantly derived from
the Integrator Product Line. The results were largely due to the beginning of
the deployment of the Cascadent supply agreement during 2000. This agreement
provided $4,370,520 in revenue for the year 2000. This agreement was
terminated upon our receipt of official word that Cascadent was placed into
receivership. Our former president, chief executive officer and chairman of
the board, Alan Bashforth, became president of Cascadent subsequent to his
service as an officer of Science Dynamics. Mr. Bashforth continues to serve
as a member of our board of directors.
The strategy for 2001 is to generate sales revenue from the IP system via
the efforts of our expanded sales team and to reinvigorate the Commander I and
II product lines, as well as, to exploit the VFX-250S product. Although the
sales of the VFX-250S did not reach the anticipated level, the market
awareness of the functionality and quality of the product has been
recognized. The sales for this product, while immaterial to total revenues,
have been primarily in South America, with future sales opportunities
generating from China and Russia. All sales made outside of the United States
are denominated in US dollars, so currency fluctuations are not a factor.
We are continuously exploring new niche opportunities, introducing new
product offerings and marketing and sales initiatives to increase market share
and value for our customers. The focus of our strategy included providing the
core technology needed to deliver a broad range of telephony services;
targeting key growth markets worldwide; promoting strategic relationships
between our customers; delivering added value through customer support and
services; and continuing to actively pursue business alliance candidates that
complement or support our core competencies.
- -12-
RESULTS OF OPERATIONS
- ---------------------
The following table sets forth income and certain expense items as a
percentage of total revenue and the change in dollar amounts of such items
compared to the previous fiscal year:
For the Years Ending December 31,
2000 1999
---- ----
Sales $5,269,377 $2,347,984
Net Loss $(1,339,262) $(2,054,886)
Net Loss Per Share $(0.08) $(0.12)
OPERATING EXPENSES PERCENT OF SALES
------------------ ----------------
2000 1999 2000 1999
---- ---- ---- ----
Cost of Goods Sold $1,891,484 $1,330,886 35.9% 56.7%
Research & Development 1,141,656 1,331,521 21.7% 56.7%
Selling, General & Admin 3,605,768 1,728,244 68.4% 73.6%
Total Operating Costs
and Expenses $6,638,908 $4,390,651 126.0% 187.0%
Sales for the fiscal year ended December 31, 2000 were $5,269,377
compared to sales of $2,347,984 in the 1999 fiscal year. The sales revenue
consists of sales primarily of our Integrator and Commander products, as well
as revenue generated from the maintenance and support of those products. The
primary factor that affected the increased sales performance was initiation of
the roll out of the Cascadent supply agreement, which provided $4,370,520 of
sales for the year. In the fourth quarter, at the request of Cascadent, we
did not supply any further products to them. The unanticipated lack of
revenue from Cascadent led to a loss of $1,693,774 in the fourth quarter of
2000. We committed our resources to the continual research and development
of the IP Telephony Integrator gateway product. Management believes the
effect of this strategy, as well as, the introduction of IP technology to its
existing Commander call control product will provide changes in the
composition of our customer base resulting in sales growth, customer
advantage, and ultimately increased shareholder value.
Sales of our Integrator product in 2000 were $4,380,520 or 83% of total
revenue compared to zero in 1999, as the product was introduced in 2000.
Sales of the Commander product in 2000 were $507,989 or 10% of total revenue
compared to $1,024,098 or 44% of total revenue in 1999, this decrease was due
to decreased sales to Bell South during 2000 and our emphasis on promoting our
Voice over internet protocol solutions. Sales of our VFX product in 2000 were
$116,235 or 2.2% of total revenue compared to $360,024 or 15% of total revenue
in 1999. This decrease is due to an unusually large sale of $250,000 in 1999
to a Brazilian company.
Maintenance and support is billed hourly at varying rates per hour
depending on the expertise of the technician required to resolve the issue.
In addition, any equipment needed to resolve a problem is also billed to the
client. There were no maintenance contracts in place during 2000 or 1999,
nor is maintenance and support included in our software license. Maintenance
revenues for 2000 and 1999 were $58,046 and $138,282, respectively. Equipment
sales related to maintenance for 2000 and 1999 were $41,407 and $399,752,
respectively.
- -13-
Cost of Goods Sold decreased 20.8% as a percentage of sales from a 56.7%
for the year ended December 1999 to 35.9% for the year ended December 2000.
This decrease is related to the difference in the sales mix in the year 2000,
with higher margin Integrator gateway sales replacing lower margin Commander
call control sales.
Research and Development expenses decreased from $1,331,521 in 1999 to
$1,141,656 in 2000, a decrease of $189,865. Research and development expenses
consist of payroll and related expenses for research and development
personnel, costs related to systems infrastructure and expenses for testing
facilities and equipment. The dollar decreases in research and development
expenses were attributable to an increase and reallocation of the number of
research and development personnel and expenses related to establishing a new
testing facility during 1999. We believe that the research and development
activities are crucial to maintaining a competitive edge in the rapid growth
of the telecommunications marketplace. We expect to continue to make
substantial investments in the research and development team to maintain a
highly skilled force of design engineers for new product development, the key
to the future.
Selling, general and administration expenses decreased 68.4% as a
percentage of sales in 2000 to $3,605,768 as compared to $1,728,244 or 73.6%
as a percentage of sales in 1999. Sales and marketing expenses consist
primarily of compensation and related costs for sales personnel, marketing
personnel, sales commissions, marketing programs, public relations,
promotional materials, travel expenses and trade show exhibit expenses. This
decrease on a percentage basis is due to the significant increase in sales
during 2000. The actual dollar increase of $1,877,524 is attributed to the
addition of eight sales and marketing personnel along with increased trade
show and advertising activity during 2000. We expect to incur substantial
expenditures related to sales and marketing activities, the recruitment of
additional sales and marketing personnel, and the expansion of our domestic
and international distribution channels.
Sales, General and Administration increased nearly $612,000 during the
fourth quarter of 2001 over the third quarter of 2001. This increase was due
to the following: write-off of bad debt of $151,560, the write-off of the
forward error correction patent in the amount of $100,104, an increase
is sales and marketing expenses mainly salaries and tradeshows in the
amount of $145,000, an increase in consulting of $92,224, an increase in
employment placement fees of $65,000, and the write-off of obsolete inventory
in the amount of $65,078, these increases were offset by immaterial
fluctuations in other areas.
Bad debts for the year were $151,559. As a result of the Cascadent
issue, we wrote off $100,159 in receivables, the receiver recently informed us
that it is unlikely that we will recover any of this amount. We also reserved
an amount of $51,400 against a receivable due from a sub-tenant, Pro-Circuits,
Inc. Science Dynamics has recently entered into a payment agreement with the
sub-tenant and believe that the amount is probable of collection. There were
no bad debt write offs in 1999.
- -14-
Six Months ended June 30, 2001 (unaudited) compared to the Six Months
ended June 30, 2000 (unaudited).
The following table summarizes the basic results of operations for the
periods indicated in the Consolidated Statement of Operations.
Six Months Ended
June 30,
2001 2000
---- ----
Sales 372,614 3,547,753
Net (Loss)/Income (2,735,928) 337,082
Net (Loss)/Income Per Share $ (0.15) $ 0.02
OPERATING EXPENSES PERCENT OF SALES
2001 2000 2001 2000
---- ---- ---- ----
Cost of Goods Sold 288,526 1,284,270 77% 36%
Research & Development 754,790 526,534 203% 15%
Sales, General & Admin. 1,839,340 1,408,305 494% 40%
Total Operating Costs
and Expenses 2,882,656 3,219,109 774% 91%
- -15-
Sales for the six-month period ending June 30, 2001were $372,614,
a decrease of $3,175,139 from sales of $3,547,753 for the six-month
period ended June 30, 2000. Our revenue in 2000 was predominantly derived
from the Integrator product line. Those results were due to the
deployment of the Cascadent supply agreement during 2000. This agreement was
terminated during the first quarter of 2001 upon our receiving official
notification that Cascadent was placed into receivership. The loss of this
contract is directly related to the decrease in sales for the first half of
the year. We have received word that Cascadent will not emerge from
receivership. Our former president, chief executive officer and chairman of
the board, Alan Bashforth, became president of Cascadent subsequent to his
serving as an officer of Science Dynamics. Mr. Bashforth continues to serve
as a member of our board of directors.
Cost of Goods sold decreased to $288,526 in the first six months of
2001from $1,284,270 in the corresponding six-month period of 2000. The
decrease in the cost of goods sold was directly related to the decrease in
sales revenue. The percentage increase of cost of goods sold as a
percentage of sales was due to the change in mix of sales between the quarters
with high margin Integrator equipment sales in 2000 compared to lower margin
legacy products and services in 2001.
Research and Development expenses increased to $754,790 in the first
six months of 2001 as compared to $526,534 in the comparable six-month
period of 2000. The increase in research and development expenses is
related to continued work on adding additional functionality to our product
mix, specifically introducing VoIP, live monitoring and recording to our
Commander II series. We believe our success will depend, in part, on our
ability to develop and introduce new products and enhancements to our existing
products. We continue to work on expanding our engineering team and intend to
continue to makesignificant investments in research and development.
Sales, General and Administrative expenses increased to $1,839,340 in
the first six months of 2001, compared to $1,408,305 in the corresponding
period of 2000. The increase is related to the addition of sales and
administrative staff during the second half of 2000 and increased consulting
fees during 2001. We increased our sales and marketing department from two
people in the first quarter of 2000 to eight in the second quarter of
2001. The major directive is to carry out a full-scale sales and marketing
program to promote awareness and recognition of our products in the
marketplace. We expect to continue to incur substantial expenditures related
to sales and marketing activities, the recruitment of additional sales and
marketing personnel and the expansion of our domestic and international
distribution channels.
Interest Expense increased to $230,524 for the period ended June 30, 2001
as compared to $0 for the same period in 2000. We entered into a $1,200,000
Convertible Note on May 22, 2001, which contained a "beneficial conversion
feature" (see the Liquidity section below for a description of the Note). Per
Emerging Issues Task Force (EITF) Number 98-5, "Accounting for Convertible
Securities with Beneficial Conversion Features or Contingently Adjustable
Conversion Ratios", this beneficial conversion feature was assigned an
intrinsic value of $212,524, as calculated under the provisions of the EITF.
This amount was immediately expensed, as the Notes were convertible into
common shares at the time of the signing of the agreement. The remaining
$18,000 in interest expense is accrued interest on the Convertible Notes.
LIQUIDITY & CAPITAL RESOURCES
Net cash used for operating activities for the years ended December 31,
2000 and 1999 was $628,040 and $874,925 respectively. The use of cash in
operating activities in 2000 resulted primarily from the net loss of
$1,339,262 and a decrease in accounts payable of $163,207, offset by decreases
in accounts receivable of $54,846, inventory of $273,416, and other assets of
$108,413.
Net cash used in investing activities was $704,246 in 2000 and $123,555
in 1999. The increase in cash used for investing activities in 2000 was
primarily attributable to capital expenditures for the purchase of computers
and software for development of our current and new products and for leasehold
improvements. We expect to increase its capital expenditures to maximize
development efforts of our new products and applications as necessary. We had
no significant commitments as of December 31, 2000 for capital expenditures.
- -16-
Net cash provided by financing activities was $2,009,134 for the year
ended December 31, 2000. This amount is related to the sale of 200,650
common shares at $8.50 per share which netted $1,570,149, the finders fee
from this transaction included the issuance of 13,115 warrants to purchase
common shares. The remaining increase in financing activities of $438,985
was related to the exercise of stock options by our employees, the sale of
net operating losses, offset by the payment on the capitalized lease.
Cash and cash equivalents decreased to $187,774 for the period ended June
30, 2001 from $1,351,641 at December 31, 2000. Net cash used for operating
activities was $2,041,134 for the six months period ended June 30, 2001
compared to $962,932 cash used for operating activities in the six month
period ended June 30, 2000. Absent significant sales in the near term, it
is anticipated that we will need to raise additional funds in the approximate
amount of $600,000 in the late September timeframe in order to maintain
our operations at the current levels through the November of 2001. Based on
our current cash flow projections and our operational budget the Company may
need to raise an additional $1,000,000 to support its business plans in the
December 2001 or January 2002 timeframe, anticipating thereafter that revenue
will increase sufficiently to fund our operational goals and additional
infusions of cash will not be required to sustain operations. In order to
preserve cash, we have reduced the number of employees from 37 to 29 since
June 2001, which we anticipate will save us $847,187 per year. In addition to
reducing the number of employees, we changed the mix of employees to more
efficiently address our needs, so that the decrease in the actual number of
employees did not have an adverse impact on our operations.
Net cash used in investing activities was $109,176 during the six-month
period of 2001 compared to $305,384 in the corresponding six-month period of
2000.
On May 22, 2001, we issued $1,200,000 principal amount of 8% convertible
debentures, due May 22, 2003, to three investors pursuant to a Subscription
Agreement dated May 22, 2001. Interest only payments are due quarterly
commencing September 30, 2001, and the principal is due in one lump sum on May
22, 2003, or upon certain events of default. The conversion price for the
convertible debentures is the lesser of 85% of the average of the three lowest
closing prices for the common stock for the 30 trading days prior to but not
including May 22, 2001, or 85% percent of the average of the three lowest
closing prices for the common stock for the 30 trading days prior to but not
including the conversion date. The maximum number of shares of common stock
that any subscriber or group of affiliated subscribers may own after
conversion at any given time is 4.99%. The number of shares of common stock
issuable upon conversion of the convertible debentures is 1,470,588, based
on a conversion price of $0.816 per share. We are required to register 200%
of this amount, for a total of 2,941,176 shares. The actual conversion price
will depend on the market price of our common stockprior to the conversion.
In addition to the convertible debentures, we also issued warrants to purchase
872,727 shares of common stock. These warrants, which expire May 22, 2006,
have an exercise price of $1.4339 per share.
Net cash provided by financing activities during the six-month period ended
June 30, 2001 was $986,443 this is related to the convertible debt described
above, offset by the payment on capitalized leases. Net cash provided by
financing for the six-month period ended June 30, 2000 was $1,724,057. This
amount is related to the sale of 200,650 common shares at $8.50 per share
which netted $1,570,149, the finders fee from this transaction included the
issuance of 13,115 warrants to purchase common shares. The remaining increase
in financing activities of $153,908 was related to the exercise of stock
options by employees of the Company.
The sales revenue shortfall in the first six months, due to a combination of
the slowdown in telecommunications spending and the loss of the Cascadent
contract, has greatly impacted cash on hand. Our currently anticipated levels
of revenue and cash flow are subject to many uncertainties and cannot be
assured. The amount of funds we require will depend on many factors,
including the extent and timing of sales, product costs, engineering and
customer/technical support requirements. The inability to obtain the required
financing and to generate sufficient cash from operations could require us to
reduce or eliminate expenditures for marketing of its products and research
and development, or curtail its operations.
- -17-
Although we have no material commitments for capital expenditures,
management anticipates a substantial increase in the need for working capital
and capital expenditures consistent with our anticipated growth plan. By
means of the growth plan, we seek to retain the services of persons who are
now employees and consultants, to secure and retain the services of new
employees and/or consultants as needed and to provide incentives for such
persons to exert maximum efforts for the success of Science Dynamics. The
amounts and timing of these expenditures will vary depending on a number of
factors, including the amount of cash generated by our operations, competitive
and technological developments and the rate of growth of our business.
- -18-
BUSINESS
Corporate Background
We were incorporated in the State of Delaware in May 1973 and started
business in July 1977 under the name Science Dynamics Corporation. Recently
we have been using the trade name SciDyn.
Overview
We develop and market product lines that we sell to telephone companies
and other telecommunications companies. Our products include devices and
software for processing telephone calls on the traditional and still prominent
telephone networks. We also have developed and are marketing devices and
software for voice and video communications using the Internet.
Industry Overview - IP Telephony
Voice over InternetProtocol or IP Telephony refers to
communication services - voice, facsimile, and voice messaging applications -
that are transported via the Internet, rather than the traditional telephone
network. The basic steps involved in originating an Internet telephone call
are conversion of the analog signal to digital format and compression and
translation of the signal into Internet protocol packets for transmission over
the Internet. The process is reversed at the receiving end.
Packet vs. Circuit switching.
To understand the difference between circuit switching and packet
switching, think of a highway between two cities. Traditional telephone
technology would use an entire lane of the highway for one car for the
duration of its trip. Packet switching technologies, like IP Telephony, fill
all of the lanes with lines of cars in each lane. IP simply makes much more
efficient use of the transmission path.
Circuit switching technology uses traditional telephone networks
inefficiently when it opens and maintains a dedicated line for every call,
regardless of the density of the information being transmitted. The result
is wasted bandwidth, as the end-to-end connection remains in place even during
those moments when no actual information is being transmitted. IP packet
technology breaks the information down into pieces, places them into
electronic packets and then fills the pipe with these packets of
information. The packets not only fill the pipe, but are also directed along
the way by routers that read the address information. They direct each
packet along the fastest route to the destination, where all of the pieces of
information are reassembled, ready for receipt by fax, computer or listener.
All of this takes place in only a fraction of a second.
Market Forces Driving Growth of IP Telephony
Growth of the Internet
The Internet is a very large global data network that has experienced
most of its growth within the last five years. The Internet is largely a
separate network from the traditional circuit-switched telephone network.
- -19-
The volume of data traffic now exceeds the volume of voice calls, and is
growing at a faster pace. The physical infrastructure of the Internet has
expanded dramatically to accommodate rapid growth in data traffic over the
Internet around the world, and such growth is expected to continue.
Deregulation
Deregulation of communications markets around the world has been a
driving force in the adoption of IP Telephony. Regulatory barriers that
restricted service providers to a particular geography and regulated rates and
service offerings are disappearing. New competitive service providers are
entering the market, challenging incumbent monopolies and offering voice
services where none existed before. The flexibility and cost-effectiveness of
IP Telephony networks, compared to circuit switched technology, are
particularly important in an increasingly deregulated and competitive market
environment. Once competitors enter new markets and deploy IP Telephony-based
networks, the incumbent service providers frequently upgrade their network to
include IP Telephony technology so that they can compete with the new
entrants.
Technological and quality improvements in IP Telephony
Developments in IP Telephony technology have significantly bridged the
voice quality gap between the circuit-switched system and IP Telephony
systems. Today a voice call placed over an IP Telephony network can sound
virtually indistinguishable from the same call made over the traditional
telephone system.
Cost savings opportunities
Voice over IP offers service providers cost savings and operational
efficiencies relative to circuit switched networks:
Efficiencies of a shared network. The Internet was initially developed
as a data network that is separate from and parallel to the circuit-switched
traditional voice network. Each network--the Internet and the circuit-switched
network--has its own dedicated equipment. Each network has operational support
systems built around it (provisioning, installation, etc.) and personnel that
manage and maintain those systems.
The unification, also called convergence, of these two networks by moving
voice traffic from the circuit-switched network onto this Internet data
network will enable service providers to share traffic, equipment and
operational support systems rather than maintaining completely separate
networks dedicated to their own applications of voice or data.
Efficiency of IP transport. When calls are routed over the Internet, the
calls are compressed. Advanced speech compression technology can compress a
call to consume as little as 10% of the network capacity that an uncompressed
circuit-switched call would take up. Because the call takes up less space, it
allows for more efficient use of the data network.
- -20-
Savings on international settlement charges. When phone calls travel
between countries over the circuit-switched network, there is usually a
per-minute settlement charge placed on each call. The originating phone
company pays the terminating phone company this settlement charge, which can
be in excess of $.20 per minute, depending on the countries exchanging
traffic. In most places, Internet traffic is generally excluded from these per
minute settlement charges. When phone calls are sent over the Internet, they
become Internet data like any other Internet traffic and are, therefore, not
subject to these settlement charges. This reduces the cost of transporting a
phone call over the Internet and provides a financial incentive for
international telecommunications service providers to route their phone
traffic over the Internet. The circuit switched settlement charges are
dropping internationally and are expected to decline over time.
Market outlook - size and growth
Telecommunication industry analysts predict strong industry growth for
the IP Telephony market. Synergy Research Group, a telecommunications market
analyst, stated in their first quarter, 2001 report, that "the market while
still small, is beginning to take off. A recent study shows the market grew
from $34.1 million in 1999 to $268.0 million in 2000, but it was still just a
tiny piece of the $20 billion traditional phone system market."
The Net-based phone market will eat into the traditional voice equipment
market within five years, growing to $532 million this year and $3.8 billion
by 2005, according to the Synergy report.
Cisco and 3Com, which entered the market in 1998 by acquiring start-up
companies, have captured most of the revenue, with Cisco leading the way with
40 percent, followed by 3Com with 15 percent, according to the Synergy market
research report. With rapid growth expected in the market, telecommunications
equipment makers that have built the traditional phone systems, called PBXs,
can't ignore the Net-based phone systems, the Synergy analysts say. Lucent
Technologies' spinoff Avaya, Nortel Networks, Alcatel and others initially
entered the market by creating hybrid technologies that combined internet
technology with traditional voice products. Now they are in various stages
of releasing Net-based phone systems according to the analysts. For example,
Avaya began selling its Net phone system in late November, "Clearly, this is
something Alcatel, Nortel and Siemens (and others) have to pay attention to
because phone system are a significant cash cow for their business," said
Synergy Founder and Principal Analyst Jeremy Duke.
Our Product for the IP Telephony Industry
IntegratorC-2000 Series of IP Gateways
We develop software and use other companies' hardware to provide
equipment that we call the IntegratorC-2000 Series of IP Gateways. Our
equipment delivers simultaneous transmission of voice, fax and data over the
Internet. This is commonly referred to in our industry as voice over Internet
protocol or IP Telephony.
- -21-
Using our technology to simultaneously transmit voice, fax and data, our
customers should be able to more efficiently and cost effectively use the
available capacity of their networks.
Our product offers service providers an opportunity to generate new
revenue and enhance their competitive position by offering their customers
personalized, enhanced services and features. Our Integrator IP Gateways are
based on our proprietary BubbleLINK(R) software that permits our customers to
add new product and service features without extensive product cost or
development time.
Our primary customer to date has been Cascadent Communications. This
company was placed in receivership after completing purchases of $4,370,520
pursuant to its contract with us. Our former president, chief executive
officer and chairman of the board, Alan Bashforth, became president of
Cascadent subsequent to his service as an officer of Science Dynamics. Mr.
Bashforth continues to serve as a member of our board of directors.
Additional potential customers include: service providers, system integrators,
resellers and enterprises. Service provider customers include traditional
local, international and wholesale long distance telecommunication companies,
as well as next generation service providers, including Internet service
providers, application service providers and others employing Internet-based
business models. Traditional telecommunication service providers and next
generation service providers are addressing business challenges and service
demands that result from a worldwide movement towards deregulation of
telecommunications markets, a trend that has been reinforced by a mandate from
the World Trade Organization.
Benefits of Our IP Telephony Solution
Total solution
We offer a suite of IP Telephony products that allow service providers to
offer services to consumers and to small, medium and large business
customers. Our products can support small or large networks; local or long
distance networks; and limited or extensive features. We provide a consistent
and flexible set of solutions to enable the processing of calls and
centralized network management functions.
New revenue streams for service providers
Our flexible, customized client-server software allows our customers to
quickly design and deliver new features and services to their customers. In a
deregulated telecommunications marketplace these services can provide sources
of revenue to the next generation communications service providers.
Distributed architecture
Our software is comprised of distinct units that can be spread across a
network. Compared to a circuit-switched network, a network using our product
may be modified quickly to accommodate new features, support new protocols or
handle new end-user devices, such as IP telephones, as they become widely-used
or available.
Voice quality
Calls over our product generally have sound quality that is
indistinguishable from the sound quality of calls over the traditional
network. In addition, our product enables the simultaneous transmission of
voice, fax and data traffic, by using standard compression and echo
cancellation technologies.
- -22-
Competition in the IP Telephony Industry
Our market is new, rapidly evolving, highly competitive and fragmented,
and we expect competition to intensify in the future. We believe that the main
competitive factors in our market are product quality, features, cost and
customer relationships. We believe a critical component to success in this
market is the ability to establish and maintain strong customer relationships
with a wide variety of service providers around the world and to facilitate
relationships between those service providers increasing the geographic
coverage of their services.
Our current principal competitors include large networking equipment
manufacturers, such as Cisco Systems, Inc.; large telecommunications equipment
manufacturers, such as Lucent Inc. and Nortel Networks Corporation; and IP
telephony technology companies, such as Clarent Corporation and VocalTec
Communications, Ltd. We also expect new competitors to emerge. Many of our
competitors are substantially larger than we are and have significantly
greater financial, sales and marketing , technical, manufacturing and other
resources, and more established distribution channels and stronger
relationships with service providers. These competitors may be able to respond
more rapidly to new or emerging technologies and changes in customer
requirements or devote greater resources to the development, promotion and
sale of their products than we can. In addition, they may be able to compete
more effectively because they will be able to add IP telephony features to
their existing equipment or bundle these features as part of a broader
solution. Furthermore, we believe some of our competitors may offer aggressive
sales terms, including financing alternatives, which we might not be able to
match. These competitors may enter our existing or future markets with
solutions that may be less expensive, provide higher performance or additional
features or be introduced earlier than our solutions. Given the market
opportunity, we also expect that other companies may enter our market with
better products and technologies. If any technology that is competing with
ours is more reliable or faster or less expensive or has other advantages over
our technology, then the demand for our products and services could decrease.
We expect our competitors to continue to improve the performance of
their current products and introduce new products or new technologies.
Successful new product introductions or enhancements by our competitors could
reduce the sales or market acceptance of our products and services, perpetuate
intense price competition or make our products obsolete. To be competitive, we
must continue to invest significant resources in research and development ,
sales and marketing and customer support. We cannot be sure that we will have
sufficient resources to make these investments or that we will be able to make
the technological advances necessary to be competitive.
Increased competition is likely to result in price reductions,
reduced gross margins and loss of market share. Our failure to compete
successfully against current or future competitors could seriously harm our
business, financial condition and results of operations.
Industry Overview - U.S. Corrections
According to the U.S. Bureau of Justice Statistics as of December 1999
- - 6.3 million adults were under some form of correctional supervision
- - approximately 4.25 million adults were under parole or probation
sanction
- - there were approximately 2.5 million inmates in state and federal
and local prisons
- - from 1990 to 1999 the number of inmates increased by an average of 6.0
percent annually
- - there are approximately 4,500 correctional facilities in the U.S.
- -23-
Calls from inmates of federal, state, and local correctional facilities
comprise an important segment of the public communications market. Inmates
typically may only place calls for a limited duration, which generates a high
volume of calls per phone, and generally may only place collect calls.
Consequently, the inmate calling market is an attractive segment of the
corrections industry to established telephone companies and other
telecommunications service providers.
The inmate calling market presents unique and substantial challenges to
the telecommunications service provider. Correctional authorities generally
favor telecommunications service providers who can manage the inmate phone
systems themselves, maintain consistent service and easily process new inmates
into the systems. Correctional authorities generally require control features
that limit the length of calls, limit the time of day calls are made, and
restrict the ability of inmates to make harassing or unapproved telephone calls.
The telecommunications service provider must be able to customize the call
control features by facility, cellblock, telephone and, in some cases, each
inmate. One of the unique challenges is to prevent the fraudulent bypassing of
these controls through three-way calling. Inmates attempt to bypass
traditional control features by calling an accomplice at an approved number
and having the accomplice use three-way calling to conference a non-allowed
party. Through this method, inmates have been known to harass and intimidate
people such as witnesses, whose numbers would otherwise be blocked, and to
call merchants to conduct fraudulent activities.
Correctional authorities generally select telecommunications service
providers on the basis of services and features provided and on the level of
commissions paid to the facilities. Competition is intense among the
telecommunications service providers and this has led to commission payments
to correctional facilities at very high levels. In addition, to win new
contracts and renew existing contracts, telecommunications service providers
must differentiate their services from those of the competition. We are
willing to customize our product and give our customers an advantage to win
new contracts and renew existing ones. Correctional authorities recognize the
benefits of outsourcing to telecommunications service providers that provide
leading edge technology that can assist their goal of improving efficiency in
operations.
Our Product for the U.S. Corrections Industry
Commander Inmate Telephone Control System (ITCS)
We develop software and use other companies' hardware to provide
specialized call processing equipment that we call the Commander to the
corrections industry. Our corrections products were originally designed in
1986 to provide timing and call control for collect phone calls made by
inmates from U.S. correctional institutions. We sell our product through
relationships with telecommunications companies or telecommunication service
providers. Our primary customer to date has been Bell South Public
Communications. Bell South is in the process of phasing out its correctional
telephone systems, and we do not expect additional sales to this customer.
Additional potential customers include: AT&T, Verizon (including GTE), Qwest
(including US West), Sprint, WorldCom and other companies that provide
telecommunications services to the corrections industry. It is our intent to
replace Bell South and to increase the number of customers using our products.
We intend to do this through increased relationship management efforts and by
offering flexible business arrangements including transaction based fees and
revenue sharing. Our products can be used at the smallest local correctional
facility or the largest state or federal correctional facility.
- -24-
Specialized call processing within the corrections industry requires the
development of advanced capabilities such as fraud control of outgoing calls
and flexible call rating systems. We sell a product specifically designed for
this industry. However, since we design our product from a modular systems
approach, we believe that with minimal effort the product could be adapted to
meet call processing needs in other industries. Industry applications such as
Hotel, Customer Relation Management (CRM), and Calling Card and International
Callback service providers can be handled from the foundation of the Commander
call processing system. Many of the Commander system modules provide core
capabilities common to all call processing applications. The call rating
module, voice prompting module, and call detail records are a requirement for
any application which processes calls such as calling card, international call
back or custom calling service applications. Another key aspect is in the
software design of the Commander application processor. This software
component was specifically designed to allow for fast adaptation to
specialized call scripts. The call script is the heart of any call processing
application. This is the vital component that interacts with a caller to
deliver the service or feature desired.
Our Commander II product can handle thousands of lines and thousands
of call transactions per hour to provide correctional facility officials with
effective tools to manage and control inmate telephone calls using the
Commander system software.
The Commander I products are designed for the small to mid sized
municipal and county correctional facilities requiring control for up to 40
inmate telephone lines. The Commander I base system provides telephone
control for four lines and can be expanded in four line increments. This
modular design provides a cost effective solution with an abundance of inmate
phone control features.
The Commander product line provides dialing instructions, call
announcement and acceptance messages and error prompts in multiple languages.
A flexible inmate account option allows for management of inmate personal
identification numbers. System control features applicable to each inmate
telephone such as call blocking, call timers, system reports, alarm parameters
and real-time display of activity allow for expanded control. The product may
be configured to have one inmate phone for every one outbound telephone line
or can be configured to concentrate multiple inmate phones to one outbound
telephone line. This line concentration allows for cost savings in the
provisioning of the number of inmate telephone lines.
The Commander I and II Call Control Systems can be configured using one or
more AdminManager workstations. The AdminManager provides real-time
administration of the Commander through an Ethernet Local Area Network (LAN)
or a Wide Area Network (WAN).
- -25-
Competition in the U.S. Corrections Industry
We compete directly against several other suppliers of inmate call processing
systems. Some of these competitors' systems have features which our inmate
call processing system does not have. These include advanced technical
features such as speaker identification or "voice print" technology to use an
inmate's voice to uniquely identify them instead of having them enter a
touch-tone Personal Identification Number. We are currently evaluating
several technology partners to integrate this technology into our inmate call
processing system. In addition our inmate call processing systems do not
currently work with coin-operated public phones which are found on a limited
basis at our customer locations. We have included the design for this feature
in our software development plan. Both of these technical issues will be
resolved in early 2002 for the inmate call processing systems.
We estimate our current market share at approximately 3% of the total
equipment market for inmate collect calling from U.S. Federal, State and
County adult facilities. The largest competitor in the market is a publicly
traded company, T Netix Inc., which has approximately a 30% market share and
acts as both an equipment provider and a telecommunications service provider.
Additionally, we estimate that Evercom, Inc. has an equal or greater market
share compared to T-Netix. We view both T-Netix and Evercom as both
competitors and potential customers for our equipment. Other equipment
competitors include Global TelLink (a wholly owned subsidiary of Schlumberger
Technologies, Inc.), Radical System Solutions, Omniphone, Value Added
Communications and Panda Systems.
Recent Developments for Commander
Our Voice over Internet Protocol technology is now available on the
Commander Inmate Telephone Control System. This enhancement reduces the
number of inmate telephone lines that are required to operate an inmate
calling system. It does this by compressing the telephone call into data
packets, thereby eliminating the need for traditional phone lines from the
facility. This new enhancement allows our customers to aggregate all of the
telephone calls from multiple locations to a central location, therefore
reducing the amount of individual phone lines needed at each facility. This
may give our customers the potential to reduce per minute charges incurred to
terminate phone calls and possibly increase their profitability.
Patents for Commander
Our Commander product line also includes our patented three-way call
detection and prevention technology that prevents inmates from bypassing
control features through three-way calling. This patent expires in 2015.
Our VFX Product for Video Conferencing over Frame Relay
Industry Overview - Frame Relay
Frame Relay has been in existence for several years, and is now the most
widely deployed data transmission means in the world.
Frame Relay, therefore seemed an obvious choice for adding video connectivity
to its wide complement of features.
- -26-
Traditionally, video conferencing has been carried via leased lines or ISDN
circuits. In the US market, due to the proliferation of ISDN availability,
video conferencing has been able to take off with a relatively high growth
curve. This is not true in the international markets where leased lines and
ISDN circuits are either not readily available or prove to be rather costly.
By leveraging the proliferation of frame relay networks throughout the world,
SciDyn intends to market the VFX-250S products in markets where ISDN and
leased line services are not available. As Frame Relay becomes more prolific,
so does the need for value added services which maximize efficiency of the
network. This has proven very successful in the past in markets such as
Brazil.
Three countrywide frame relay networks are presently under construction in
China. Trials are continuing and we continue to anticipate possible business
opportunities in the latter part of 2001.
Sales of the VFX-250S have been slow throughout 2000. There are a number of
large-scale projects quoted late last year, which have not yet been awarded.
These include opportunities in China and Russia. Brazil continues to proceed
steadily and is anticipated to provide sales.
VFX Product Competition
We do not compete with any other company in the video over Frame Relay market.
Traditionally, video conferencing has been done using ISDN or leased line
connections. Frame Relay has been in existence for several years, and is now
the most widely deployed data transmission means in the world. The
significance of our technology is the new and innovative ability to take
standard videoconferencing, "packetize it" and route it over a Frame Relay
network. To date, we are not aware of any other video over frame relay
products which perform this function.
The advantage of video over Frame Relay is the substantial cost savings. A
customer can get maximum efficiency from their existing Frame Relay
infrastructure to satisfy all their communications needs. There are no
additional monthly expenses for other services, in comparison to all the
traditional video conferencing solutions. For example: International ISDN call
prices frequently exceed $1 per minute per line. By eliminating this
substantial cost, the return on investment for video, voice and data over a
single Frame Relay network, even with the higher international rates for Frame
Relay, is dramatic.
Sales and Marketing
During the last two years, we have significantly increased our sales and
marketing staff, launched new web initiatives and implemented a complete sales
automation process. This has increased our efficiency and effectiveness to
evaluate opportunities generated from web inquiries, trade shows, press
releases, and partner relationships. Our intent is to diversify our customer
base, thereby limiting the business risk of only having several key customers.
Research and Development
The majority of the research and development activities are conducted at
our facility using our array of telephony resources and the technical
expertise of its engineering staff. We have fourteen employees currently
engaged in engineering and research and development. We plan to devote a
substantial portion of our resources to research and development and to
continue utilizing subcontractors to enhance our engineering staff.
- -27-
During 2000 and 1999, we spent $1,141,656 and $1,331,521 on research and
development. We anticipate that an increase in future research and
development expenditures will be necessary to remain competitive in the
rapidly changing telecommunications industry. We intend to utilize other
companies to accelerate the development of new product offerings, although we
have no specific plans to do so as of the date hereof.
The Voice Enabled Commander, Voice over IP technology on the Call Control
Platform which we announced January 22, 2001, was developed internally. There
have been no sales generated to date.
Materials and Principal Suppliers
Our IntegratorC-2000 product lines use our proprietary BubbleLINK(R)
software. We use a combination of industry standard computer telephony
hardware including commercial grade personal computer technology, telephone
voice cards, the Windows NT operating system, and our Integrator software.
Our primary effort is the software design of products, limited hardware
design and system integration of purchased products. We purchase equipment
then integrate our custom software. We try to purchase equipment for use in
our products by establishing relationships with industry leaders in the
networking, telecom, and personal computer industry.
We selected Natural Microsystems as the hardware vendor for the telephony
voice card used in our products. We chose Natural Microsystems for its
technical expertise, high level of service and worldwide support. Natural
Microsystems is the sole source supplier for certain circuit boards we use,
however, we do not have any formal supply agreement with them.
We selected Crystal Group, Inc. as the hardware integration source for
our IP Telephony gateways. By integrating our software with Crystal Group's
hardware platform, we believe based upon past performance that the two
companies should be capable of a high level of service and support to
telecommunications companies worldwide.
Our Commander product lines are built on our proprietary BubbleLINK(R)
software. We use a combination of industry standard computer telephony
hardware including commercial grade personal computer technology, telephone
voice cards, and the Windows NT operating system, and our Integrator software.
Our VFX Video over Frame Relay product line manufacturing is outsourced
to third party contract hardware manufacturers.
Customers
During 2000, two customers accounted for 83% and 15% of total sales.
During 1999, three customers and their operating subsidiaries accounted for
64%, 10% and 10% of total sales. The customer accounting for 83% of total
2000 sales was Cascadent Communications, with whom we had a supply agreement.
Our former president, chief executive officer and chairman of the board, Alan
Bashforth, became president of Cascadent subsequent to his service as an
officer of Science Dynamics. Mr. Bashforth continues to serve as a member of
our board of directors. The agreement was terminated on January 4, 2001,
- -28-
upon receiving notice that Cascadent was placed into receivership. In a
letter dated June 25, 2001, the Cascadent receiver advised that it was not
possible to achieve a sale of Cascadent's business as a going concern. The
letter also stated that it appears that there will be insufficient funds
available for a liquidator to be appointed in this matter. Bell South
Communications, which accounted for 15% of our sales in 2000, recently
announced that it was withdrawing from the public phone market, so future
sales to Bell South are unlikely.
With the introduction of the new product lines and the expansion of the
sales team from two to 10 people, we anticipate less reliance on any single
customer or market in the future.
Employees
As of July 1, 2001, we employed 29 persons on a full time basis. We
supplement full-time employees with subcontractors and part- time individuals,
according to our workload requirements.
Facilities
Pursuant to a ten year lease commencing May 1, 1995, we lease a 50,000
square foot freestanding masonry building in an industrial park in Cherry
Hill, New Jersey, utilized for office space and testing of our products and
other corporate activities. In the latter part of 1998, we subleased 25,645
square feet of the building to a printed circuit board manufacturer. Such
sublease is currently in default, and we have engaged legal counsel who has
filed a complaint to evict such tenant. The tenant is currently in
negotiations with us to cure the default and reinstate the sublease. We also
lease a small office space in Crawley, United Kingdom, on a month to month
basis.
Legal Proceedings
We have been named as a defendant in a lawsuit brought on March 5, 2001,
by prisoners of correctional institutions in which our Commander systems have
been installed. The lawsuit, which seeks unspecified damages, is entitled
Mildred Fair, et al., v. Sprint Payphone Services, Inc.,et al., U.S. District
Court, District of South Carolina, Greenville Division, Docket No.: CA No.
6:01-626-20. This is a class action lawsuit brought against numerous
defendants, including a number of telephone companies. We believe that we
have adequate defenses against such lawsuit, and given the nature of our
involvement with the transactions set forth in the complaint, we do not
believe the lawsuit to be material.
Except for the foregoing, we are not a party to any litigation and no
action against us has been threatened or is known to be contemplated by any
governmental agency or subdivision or any other entity.
- -29-
MANAGEMENT
The following table sets forth certain information regarding our
directors and executive officers as of September 4, 2001.
Name Age Position with the Company and term served
---- --- -----------------------------------------
Sheldon Hofferman 56 Chairman of the Board since
November 30, 2000 and Director
since September 17, 1997
Joy C. Hartman 52 President and Chief Executive
Officer since January 28, 2000,
and Director since May 7, 1991
Kenneth P. Ray 67 Director since May, 1990
Alan C. Bashforth 51 Director since November 7, 1996
John Innes 68 Director since October 12, 2000
L. Michael Hone 51 Director since October 12, 2000
Louis Padulo 64 Director since January 17, 2001
Robert O'Connor 39 Vice President of Finance and
Administration since May 15, 2000
Joseph Giegerich 34 Vice President of Sales and
Marketing since October 10, 2000
Thomas Spadaro 40 Vice President of Technology
since December 12, 2000
Directors are elected at the annual meeting of shareholders for a period
of one year. Directors appointed to fill vacancies or to increase the number
of board members serve until the next annual meeting.
Sheldon C. Hofferman, has been an Attorney and Private Investor since
1971. Mr. Hofferman graduated from the University of Pennsylvania in 1966 and
Temple University Law School in 1971. He was in private law practice in
Washington, D.C., specializing in communications law, from 1971 to 1974. He
served as Senior Trial Attorney for the Federal Trade Commission from 1974 to
1983, and re-entered private law practice thereafter. Mr. Hofferman has also
served as General Partner of Golden Phoenix Limited Partnership, an investment
concern, since 1983.
Joy C. Hartman became President and Chief Executive Officer in January
2000, and continues to serve as Assistant Secretary and Treasurer. Ms. Hartman
joined us in January 1982. In addition to holding these positions, other
positions she has held with us include CFO, Treasurer, Corporate Secretary,
and Executive Vice President. Her prior experiences included TeleSciences,
Inc., and Peat Marwick Mitchell. Ms. Hartman is a graduate of The Wharton
School of Business of the University of Pennsylvania. She is a member of the
Financial Executives Institute, the National Association of Corporate
Directors, and the American Society of Corporate Secretaries.
- -30-
Kenneth P. Ray has been President of DelRay, Inc., an active
telecommunications consulting firm, for more than the past five years. From
1964 to 1987, he was associated with ITT in various responsible positions and
in 1976 became Vice President of ITT Telecommunications, with responsibility
for engineering, marketing and sales departments. In 1981, he became Vice
President and Director of Operations for the Transmission Division of ITT
Space Communications. In January 1987, ITT's telecommunications group was
acquired by Alcatel and Mr. Ray became Vice President of Marketing and
Development for Alcatel Network Systems. From 1988 to 1991, he was Vice
President for Technology and Business Development for Alcatel North America, a
telecommunications company. Mr. Ray received a BSEE from Polytechnic
Institute of New York in 1954 and a Masters in Economics from North Carolina
State University in 1970.
Alan C. Bashforth, President and Chief Executive Officer of SciDyn until
January 2000, relinquished those positions and served as Chairman of the Board
until November 15, 2000. He was President of Cascadent Communications, a
major customer of SciDyn until December 15, 2000. Previously he was President
of Innovative Communications Technology, LTD. (ICT), a data communications
company, located in Jersey, Channel Islands, until the acquisition of the
intellectual property of ICT by us in November 1996. Prior experience
included ownership of the CSL Group of companies from its inception in 1975.
CSL is a Communications and Computer engineering group and employed over 100
people in 1992 when Mr. Bashforth sold the company. From 1970 to 1975, Mr.
Bashforth was employed by Automaten CI, LTD., an office equipment and
telecommunications company, in various engineering and sales positions leading
to the position of General Manager. Mr. Bashforth was educated in electronic
engineering at Mid Herts Polytechnic College in England and holds a Higher
National Diploma in Electronic Engineering. Mr. Bashforth also serves as a
Director of Satellite Media Services Ltd.
John Innes, has been Chairman since December 1997 of ACHP, a company
started to meet the need of electronic banking/funds transfer marketing and
processing. From 1994 through December 1997, he was engaged in his own
practice as an attorney, investor and consultant. He has 30 years of
experience managing, reorganizing, and financing public and private companies.
Since 1971, he has been an attorney, consultant and investor in companies in
various industries including investment banking, media, aviation, waste
management and electronic commerce. From 1992 to 1994, Mr. Innes was Chairman
of Commonwealth Associates, a New York based investment- banking firm. Mr.
Innes served as Vice-Chairman of Wheeling-Pittsburgh Steel Corporation;
Managing Director of Sabre Insurance Company Limited from 1986 - 1991; he also
served as General Counsel of Gulfstream Aerospace Corporation from 1976 -
1986. Mr. Innes graduated from Williams College and from Temple University
Law School.
L. Michael Hone, was the President and Chief Executive Officer of
Centennial Technologies, Inc., a publicly traded company, from August 1997
through June 2001. Previously he was Chairman and Chief Executive Officer of
PSC, Inc., a publicly held manufacturer of hand-held and fixed-position
laser-based bar code scanners, scan engines and other scanning products from
1992 to 1997. Mr. Hone also served as director of Rochester Healthcare
Information Group, Inc., a company principally engaged in providing data
processing management to the healthcare industry. Mr. Hone served as director
of the Association for the Blind and Visually Impaired, Inc., which is
principally engaged in assisting the blind and visually impaired to achieve
vocational and social independence. Mr. Hone was previously chairman of AIM
USA and AIM International. Mr. Hone is a named inventor on six United States
patents. He attended Ohio State University where he majored in Business.
- -31-
Louis Padulo, a President Emeritus of University City Science Center in
Philadelphia Pennsylvania since 1997, served as President and Chief Executive
Officer of the non-profit consortium of leading universities and
organizations, between 1991 and 1996. Previously, he served as President of
the University of Alabama in Huntsville and has held a number of
administrative and faculty positions with Boston University, Stanford
University, Morehouse College, Massachusetts Institute of Technology, and the
University of Tokyo among others. Additionally, Mr. Padulo possesses
extensive industry and consulting experience, and has held and continues to
hold a number of board and directorship positions with both public and private
organizations. Mr. Padulo received a Bachelor of Science degree from
Fairleigh Dickinson University, a Master of Science degree in Electrical
Engineering from Stanford University, and a Ph.D. from the Georgia Institute
of Technology.
Robert O'Connor came to us from PricewaterhouseCoopers, L.L.P in
Philadelphia, PA, where he served from January 1998 to May 2000, as a manager
of middle market advisory services. Form May 1996 to June 1997, he served as
controller of Optic Image Software Corporation. Mr. O'Connor served as vice
president of finance and administration at AW Computer Systems from May 1993
to September 1996. Mr. O'Connor received his MBA from Rutgers-Graduate School
of Management, BS from Kean University in Union, NJ, and he is a Certified
Public Accountant.
Joseph Giegerich has more than 11 years of product marketing, product
introduction, and marketing strategy experience in the telecommunications
field, specializing in advanced and emerging technologies. He has been
involved in new business development, including two startups, an acquisition,
and a successful IPO. Most recently from November 1999 to September 2000, he
served as Vice President of Sales for iFace.com, a telecommunications
equipment provider specializing in Internet and Computer Telephony
applications. Previously, from May 1998 to November 1999, he served as
Director of Key Accounts with Philips Speech Processing, a division of Philips
Electronics NA, where he directly managed $40 million in strategic channel
relationships for Philips core speech technology. He was one of the original
founders November 1991 to April 1998, of Voice Systems Technology (VST), a
company offering network-based enhanced service platforms and pre-paid
wireless applications. VST was subsequently sold to Boston Communications
Group and went public shortly after. Earlier in his career, he built and
launched a successful voice messaging service bureau. He earned a degree from
Rutgers University in Economics, with a minor in Computer Science.
Thomas Spadaro, who has been with Science Dynamics for the past 18 years,
manages the development and design of all major product offerings for us.
Presently, his main task is to develop solutions that facilitate the
transition from a circuit-switched network to a digital, packet-based
communications environment. Among the projects he has spearheaded since
joining SciDyn in 1983 are the Integrator Series of IP gateways, the Call
Control System for correctional facilities and the VFX-250S, Video over Frame
Relay Access Device. He previously served as our Director of Engineering.
- -32-
Board of Directors Committees and Other Information
All directors hold office until the next annual meeting of shareholders
and until their successors have been duly elected and qualified. Officers are
elected by and serve at the discretion of the Board of Directors. There are no
family relationships among our directors or officers. The Board of Directors
currently has an Audit Committee and a Compensation Committee. The Audit
Committee oversees the actions taken by our independent auditors and reviews
our internal financial and accounting controls and policies. The Compensation
Committee is responsible for determining salaries, incentives and other forms
of compensation for our officers, employees and consultants and administers
our incentive compensation and benefit plans.
Directors' Compensation
We do not compensate members of our Board of Directors for their
services. We reimburse non-employee Directors for their reasonable expenses
incurred in attending meetings of our Board.
Executive Compensation
The following table sets forth the total compensation paid to our
president and other executive officers whose compensation during any of the
past three years exceeded $100,000.
SUMMARY COMPENSATION TABLE
Annual Compensation Long term compensation
----------------------- --------------------------
Name and Year Salary Bonus Other Awards All
Principal ($) ($) Annual Restrict- Options/ LTIP Other
Position Compen- ed Stock SARs(#) Pay- Compensa-
sation ($) Award(s)($) outs($) tion ($)
- ---------- ---- ------ ----- ---------- --------- ---------- ------ --------
Joy C.Hartman, 2000 161,185 -0- 1,666 -0- 100,000 -0- -0-
President and 1999 113,237 -0- -0- -0- 10,000 -0- -0-
CEO (1) 1998 111,000 -0- 5,632 -0- -0- -0- -0-
1 Ms. Hartman was appointed our President and CEO in January 2000.
Option Grants in Fiscal 2000
The following table shows information regarding stock options granted to
our executive officers during the fiscal year ended December 31, 2000
Name and Position No. of Securities % of Total Options Exercise Expiration
Underlying Granted to Employees price Date
Options Granted in Fiscal Year
- --------------------------------------------------------------------------------------
Joy C. Hartman
President and CEO
100,000 24.5% $5.00 1/5/2010
Robert C. O'Connor,
Vice President of
Finance and
Administration,
Chief Financial
Officer 20,000 4.9% $7.625 8/2/2010
Thomas Spadaro,
Vice President of
Technology
25,000 6.1% $7.625 6/5/2010
Joseph Geigerich,
Vice President Sales
and Marketing
60,000 14.7% $1.87 10/16/2010
- -33-
Stock Options Exercised During Fiscal Year
None of our executive officers or directors exercised stock options or
stock appreciation rights during the fiscal year ended December 31, 2000.
Fiscal Year-end Option Values
The following table shows information regarding the value of
unexercised options held by executive officers as of December 31, 2000:
Number of Securities Value of Unexercised
Underlying In-The-Money Options (1)
Unexercised Options
- ------------------------------------------------------------------------------------
Name & Position Exerciseable Unexerciseable Exerciseable Unexerciseable
- ------------------------------------------------------------------------------------
Joy Hartman, President
and CEO 155,000 - $8,469 -
Joseph Giegerich, Vice
President - Sales and
Marketing 60,000 60,000 - -
Thomas R. Spadaro,
Vice President -
Technology 56,200 - $5,167 -
Robert O'Connor, Vice
President - Finance
and Administration,
Chief Financial
Officer 20,000 - - -
____________
____________
(1)Value of unexercised options is based on the closing bid price of our
common stock on the Nasdaq SmallCap Market on December 31, 2000, minus the
exercise price.
Employment Contracts
We have an employment agreement with Joy C. Hartman, our President, CEO
and a Director. The employment agreement contains change in control
provisions that would entitle her to receive up to 2.99 times the annual
salary if there is a change in control of our company (as defined) and a
subsequent termination of employment. The maximum contingent liability under
this agreement in such event is approximately $523,250.
- -34-
1992 Stock Option Plan
Our 1992 incentive stock option plan, as filed with our registration
statement on Form S-8 with the Securities and Exchange Commission on June 5,
1992, reserved 290,950 common shares for issuance; on March 22, 2000, we
filed a post-effective amendment to increase the shares reserved for issuance
to 1,378,950, of which 505,700 common shares are underlying outstanding
stock option grants and 873,250 common shares remain available for future
stock awards.
RELATED PARTY TRANSACTIONS
In February 2000, we entered into an agreement for consulting services
with Alan Bashforth. The consulting services primarily related to
identifying, evaluating, and recommending business strategies for us. This
agreement expired on April 30, 2001 and was not renewed. Mr. Bashforth
received an aggregate of $150,000 pursuant to the agreement.
On February 11, 2000, we entered into a supply agreement with Cascadent
Communications (formerly @IPbell Inc.). Pursuant to the terms of the
agreement, Cascadent agreed to purchase $4,180,800 of our Integrator gateway
products. Cascadent also expressed its intent, in the agreement, to purchase
either directly, or through a third party vendor, additional equipment
amounting to approximately $13,000,000. During the course of the agreement, we
sold $4,370,146 of our Integrator gateway products under the agreement. The
agreement was terminated on January 4, 2001, upon receiving notice that
Cascadent was placed into receivership. In a letter dated June 25, 2001, the
Cascadent receiver advised that it was not possible to achieve a sale of
Cascadent's business as a going concern. The letter also stated that it
appears that there will be insufficient funds available for a liquidator to be
appointed in this matter. We have outstanding invoices in the amount of
$100,159, but presently have no expectations that such amounts will be
recovered. The pricing of the products sold and the terms and conditions of
sale were no more favorable than those provided to unrelated parties, although
Cascadent did have the right to receive prices as favorable as those offered
to any other customer. Our former President, chief executive officer and
Chairman of the Board, Alan Bashforth, became president of Cascadent
subsequent to his service as an officer of Science Dynamics. Mr. Bashforth
continues to serve as a member of our board of directors.
We believe, based upon our experience in the industry, that the terms of
the foregoing agreements were no more favorable than those which could have
been obtained from unaffiliated third parties.
- -35-
PRINCIPAL SECURITY HOLDERS
The following table sets forth information regarding the beneficial
ownership of our common stock, as of the date of this prospectus. The
information in this table provides the ownership information for:
- - each person known by us to be the beneficial owner of more than 5% of
our common stock;
- - each of our directors and director nominees;
- - each of our executive officers; and
- - our executive officers, directors and director nominees as a group.
Beneficial ownership has been determined in accordance with the rules and
regulations of the Securities and Exchange Commission and includes voting or
investment power with respect to the shares. Unless otherwise indicated, the
persons named in the table have sole voting and investment power with respect
to the number of shares indicated as beneficially owned by them. The number of
shares of common stock outstanding used in calculating the percentage
ownership for each person listed below includes shares of common stock
underlying options or warrants held by the person that are exercisable within
60 days of the date of this prospectus. Common stock beneficially owned and
percentage ownership are based on 17,657,901 shares outstanding before this
offering and 21,471,804 shares to be outstanding after the completion of this
offering.
Percentage of Common Stock
Beneficially Owned
- ---------------------------------------------------------------------------------------------
Name, Address and Title of Number of Shares
Beneficial Owner Beneficially Owned Before Offering After Offering
- ---------------------------------------------------------------------------------------------
Sheldon C. Hofferman,
Chairman (1)
PO Box 350
Fairfax Station, VA 22039 2,619,921 14.84% 12.20%
Alan C. Bashforth, Director (2)
Le Virage
La Route de Sainte Marie,
St. Mary, Jersey, UK
JE3 3DB 1,520,000 8.61% 7.08%
Edwin S. Marks, 5% owner
135 East 57th Street
27th Floor
New York, New York 10022 1,129,000 6.39% 5.26%
Charles Bresler, 5% owner
401 M Street SW
Washington, DC 1,322,666 7.49% 6.16%
Joy C. Hartman, President,
CEO (3)
27 Hogan Way
Moorestown, NJ 08057 215,185 1.22% 1.00%
- -36-
Kenneth P. Ray, Director (4)
909 Darfield Drive
Raleigh, NC 27615 46,300 0.26% 0.22%
Joseph Giegerich, Vice
President Sales & Marketing
46 Longbridge Dr.
Mount Laurel, NJ 08054 25,000 0.14% 0.12%
Thomas Spadaro (5)
Vice President of
Engineering
41 Fountain Blvd
Burlington, NJ 08016 82,455 0.47% 0.38%
Robert O'Connor (6)
Vice President of Finance
and Administration
53 Sorrel Run
Mt. Laurel, NJ 08054 20,000 0.11% 0.09%
All executive officers,
directors, and director
nominees as a group
(7 persons) 6,980,527 39.53% 32.51%
______________
(1)The total includes 2,619,921 shares owned by Golden Phoenix, LP., of which
Mr. Hofferman is General Partner.
(2)Shares in the name of Innovative Communications Technology, LTD., a
corporation, controlled by Mr. Bashforth.
(3)The 215,185 shares in Ms. Hartman's name include incentive options,
exercisable within sixty days to acquire 155,000 shares, and 20,000 warrants,
and 300 shares owned by Ms. Hartman's children.
(4)The 46,300 shares owned by Mr. Ray include incentive options, exercisable
within sixty days to acquire 30,000 shares.
(5)The 82,455 shares owned by Mr. Spadaro include incentive options,
exercisable within sixty days to acquire 56,200 shares.
(6)The 20,000 shares owned by Mr. O'Connor include incentive options,
exercisable within sixty days to acquire 20,000 shares.
- -37-
DESCRIPTION OF SECURITIES
Our authorized capital stock consists of 45,000,000 shares of common
stock, par value $.01 per share.
The description of our securities are summaries of the material
provisions of our securities. For more complete information, you should read
our certificate of incorporation and its amendments.
Common Stock
Holders of our common stock are entitled to one vote for each share held
on all matters submitted to a vote of stockholders and do not have cumulative
voting rights. Accordingly, holders of a majority of the shares of our common
stock entitled to vote in any election of directors may elect all of the
directors standing for election. Holders of our common stock are entitled to
receive dividends ratably, if any, as may be declared from time to time by our
board of directors out of funds legally available therefore. Upon the
liquidation, dissolution or winding up of us, the holders of our common stock
are entitled to receive ratably, our net assets available after the payment of
all liabilities.
Holders of our common stock have no preemptive, subscription, redemption
or conversion rights, and there are no redemption or sinking fund provisions
applicable to the common stock. The outstanding shares of our common stock
are, and the shares offered by us in this offering will be, when issued and
paid for, validly issued, duly authorized, fully paid and nonassessable.
Warrants
On November 7, 1996, we issued warrants to purchase 20,000 shares of our
common stock at an exercise price of $.78125 per share, to Joy C. Hartman,
our President and CEO. The warrant terminates on November 7, 2001 and may
be exercised at any time until such date.
Recent Financing
On May 22, 2001, we issued $1,200,000 principal amount of 8% convertible
debentures, due May 22, 2003, to three investors pursuant to a Subscription
Agreement dated May 22, 2001. Interest only payments are due quarterly
commencing September 30, 2001, and the principal is due in one lump sum on
May 22, 2003, or upon certain events of default. The conversion price for
the convertible debentures is the lesser of 85% of the average of the three
lowest closing prices for the common stock for the 30 trading days prior to
but not including May 22, 2001, or 85% percent of the average of the three
lowest closing prices for the common stock for the 30 trading days prior to
but not including the conversion date. This embedded conversion feature was
valued at $212,523 and was recorded in the second quarter of 2001 as
interest expense per EITF 98-5. This was calculated by taking 85% of the
average of the three lowest closing prices in the thirty days preceding the
signing of the agreement and assumed that the entire $1,200,000 was
converted. The agreement does not have a waiting period for conversion, so
the entire amount was expensed in the period the Agreement was signed. The
maximum number of shares of common stock that any subscriber or group of
affiliated subscribers may own after conversion at any given time is 4.99%.
The number of shares of common stock issuable upon conversion of the
convertible debentures is 1,730,103, based on a conversion price of $0.816
per share. We are required to register 200% of this amount, for a total of
2,941,176 shares. The actual conversion price will depend on the market
price of our common stock prior to the conversion. The following table
illustrates the effect of a decline in the market price of our common stock
as it relates to the number of shares we will be required to issue upon
conversion:
- -38-
Stock Shares
Price Issuable
-----------------------------
$.816 1,730,103
$.60 2,352,941
$.40 3,529,411
$.20 7,058,823
$.10 14,117,647
In addition to the convertible debentures, we also issued warrants to
purchase 872,727 shares of common stock. These warrants, which expire May 22,
2006, have an exercise price of $1.4339 per share.
Transfer Agent
The Transfer Agent and Registrar for the common stock and the warrants
described above is Continental Stock Transfer & Trust Company.
- -39-
SELLING SHAREHOLDERS
The table below sets forth information concerning the resale of the shares of
common stock by the selling stockholders. We will not receive any proceeds
from the resale of the common stock by the selling stockholders. We will
receive proceeds from the exercise of the warrants. Assuming all the shares
registered below are sold by the selling stockholders, none of the selling
stockholders will continue to own any shares of our common
stock.
The following table also sets forth the name of each person who is offering
the resale of shares of common stock by this prospectus, the number of shares
of common stock beneficially owned by each person, the number of shares of
common stock that may be sold in this offering and the number of shares of
common stock each person will own after the offering, assuming they sell all
of the shares offered.
Name Total Shares of Total Shares of Beneficial Percentage of Beneficial Percentage
Common Stock Percentage of Common Stock Ownership Common Stock Ownership of Common
Issuable Upon Common Stock, Included in Before Owned Before After the Stock
Conversion of Assuming Full Prospectus(1) the Offering(2) Offering Offering Owned After
Notes and/or Conversion (3) Offering(3)
Warrants
- -------------------------------------------------------------------------------------------------------------------------
Laurus
Master
Fund, Ltd.
(4)(5)(6) 1,952,763 9.96 3,178,253 927,406 4.99 -- --
The Keshet
Fund, L.P.
(4)(5)(7) 195,276 1.77 317,825 195,276 1.77 -- --
Keshet
L.P.
(4)(5)(7) 195,276 1.77 317,825 195,276 1.77 -- --
The number and percentage of shares beneficially owned is determined in
accordance with Rule 13d-3 of the Securities Exchange Act of 1934, and the
information is not necessarily indicative of beneficial ownership for any
other purpose. Under such rule, beneficial ownership includes any shares as
to which the selling stockholder has sole or shared voting power or investment
power and also any shares which the selling stockholder has the right to
acquire within 60 days. The actual number of shares of common stock issuable
upon the conversion of the debentures and exercise of the debenture warrants
is subject to adjustment depending on, among other factors, the future market
price of the common stock, and could be materially less or more than the
number estimated in the table.
(1) Includes 200% of the shares issuable on conversion of the
convertible notes, based on the market price of our common stock on May 23,
2001, as required by our agreement with the selling shareholders. The number
of shares of common stock issuable upon conversion of the debentures is
dependent in part upon the market price of the common stock prior to a
conversion, the actual number of shares of common stock that will be issued in
respect of such conversions and, consequently, offered for sale under this
registration statement, cannot be determined at this time. As a result of the
contractual agreement not to exceed 4.99% beneficial ownership, the selling
shareholder does not believe it is a control person as defined in the
Securities Exchange Act of 1934 or is required to file a Schedule 13D.
- -40-
(2) Represents shares of common stock issuable upon conversion of
debentures of the selling shareholder at an assumed conversion price of $0.81
per share and/or exercise of warrants of the selling shareholder at a
conversion price of $0.81 per share. However, the selling shareholder has
contractually agreed to restrict its ability to convert its debentures or
exercise its warrants and receive shares of our common stock such that the
number of shares of common stock held by it and its affiliates after such
conversion or exercise exceed 4.99% of the then issued and outstanding shares
of common stock following such conversion or exercise. This restriction may
not be waived.
(3) Assumes that all securities registered will be sold.
(4) The following chart discloses the principal(s) of each selling
securityholder and the person(s) with investment and dispositive power:
Investment/dispositive
Securityholder Principal authority
-------------------------------------------------------------------
Laurus Master Fund, Ltd. Eugene Grin Eugene Grin
& David Grin & David Grin
The Keshet Fund, L.P. Abraham Grin John Clark
Keshet L.P. Abraham Grin John Clark
(5) Laurus Master Fund, Ltd., Keshet Fund LP and Keshet LP are under
common control and all shares registered hereunder may be deemed to be
beneficially owned by such control person. All such selling stockholders may
be deemed to be a purchasing group for purposes of Rule 13d, but are not
required to file a Form 13d because of the limitation of their beneficial
ownership to 4.99%, as a group.
(6) Includes 727,273 shares issuable upon exercise of warrants presently
exercisable at a price of $1.4339 per share.
(7) Includes 72,727 shares issuable upon exercise of warrants presently
exercisable at a price of $1.4339 per share.
Plan of Distribution
The selling stockholders may, from time to time, sell any or all of their
shares of common stock on any stock exchange, market, or trading facility on
which the shares are traded or in private transactions. These sales may be at
fixed or negotiated prices. There is no assurance that the selling
stockholders will sell any or all of the common stock in this offering. The
selling stockholders may use any one or more of the following methods when
selling shares:
- -41-
- - Ordinary brokerage transactions and transactions in which the broker-dealer
solicits purchasers.
- - Block trades in which the broker-dealer will attempt to sell the shares
as agent but may position and resell a portion of the block as principal to
facilitate the transaction.
- - An exchange distribution following the rules of the applicable exchange
- - Privately negotiated transactions
- - Short sales or sales of shares not previously owned by the seller
- - A combination of any such methods of sale or any other lawful method
The selling stockholders may also engage in:
- Short selling against the box, which is making a short sale when
the seller already owns the shares.
- Other transactions in our securities or in derivatives of our
securities and the subsequent sale or delivery of shares by the
stockholder.
- Pledging shares to their brokers under the margin provisions of
customer agreements. If a selling stockholder defaults on a
margin loan, the broker may, from time to time, offer to sell
the pledged shares.
Broker-dealers engaged by the selling stockholders may arrange for other
broker-dealers to participate in sales. Broker-dealers may receive commissions
or discounts from selling stockholders in amounts to be negotiated. If any
broker-dealer acts as agent for the purchaser of shares, the broker-dealer
may receive commission from the purchaser in amounts to be negotiated. The
selling stockholders do not expect these commissions and discounts to exceed
what is customary in the types of transactions involved.
The selling stockholders and any broker-dealers or agents that are involved in
selling the shares may be considered to be "underwriters" within the meaning
of the Securities Act for such sales. An underwriter is a person who has
purchased shares from an issuer with a view towards distributing the shares to
the public. In such event, any commissions received by such broker-dealers or
agents and any profit on the resale of the shares purchased by them may be
considered to be underwriting commissions or discounts under the Securities
Act.
Because the following selling shareholders are deemed "underwriters" within
the meaning of Section 2(11) of the Securities Act, they will be subject to
the prospectus delivery requirements:
Laurus Master Fund, Ltd.
The Keshet Fund, L.P.
Keshet L.P.
We are required to pay all fees and expenses incident to the registration
of the shares in this offering. However, we will not pay any commissions or any
other fees in connection with the resale of the common stock in this
offering. We have agreed to indemnify the selling shareholders and their
officers, directors, employees and agents, and each person who controls any
- -42-
selling shareholder, in certain circumstances against certain liabilities,
including liabilities arising under the Securities Act. Each selling
shareholder has agreed to indemnify us and our directors and officers in
certain circumstances against certain liabilities, including liabilities
arising under the Securities
Act.
If the selling stockholder notifies us that they have a material
arrangement with a broker-dealer for the resale of the common stock, then we
would be required to amend the registration statement of which this prospectus
is a part, and file a prospectus supplement to describe the agreements between
the selling stockholder and the
broker-dealer.
LEGAL MATTERS
Sichenzia, Ross, Friedman & Ference LLP, New York, New York, will pass
upon certain legal matters with respect to the shares of the common stock
offered hereby.
EXPERTS
Peter C. Cosmas, CPA's, independent auditors, have audited, as set forth
in their report thereon appearing elsewhere herein, our financial statements
as of December 31, 2000 and 1999, and for the years then ended, that appear in
this prospectus. The financial statements referred to above are included in
reliance upon the report by the auditors given upon their authority as experts
in accounting and auditing.
HOW TO GET MORE INFORMATION
We have filed with the SEC a registration statement on Form SB-2 under
the Securities Act with respect to the shares to be sold in this offering.
This prospectus does not contain all the information contained in the
registration statement. For further information with respect to our company
and the shares to be sold in this offering, reference is made to the
registration statement and the exhibits and schedules filed with the
registration statement. We have described all material information for each
contract, agreement or other document filed with the registration statement in
this prospectus. However, statements contained in this prospectus as to the
contents of any contract, agreement or other document referred to are not
necessarily complete. As a result, you should refer to the copy of the
contract, agreement or other document filed as an exhibit to the registration
statement for a complete description of the matter involved.
You may read and copy all or any portion of the registration statement or
any reports, statements or other information that we file at the SEC's public
reference room at 450 Fifth Street, N.W., Washington, D.C. 20549. You can reques
t copies of these documents, upon payment of a duplicating fee, by writing to
the SEC. Please call the SEC at 1-800-SEC-0330 for further information on the
operation of the public reference rooms. Our SEC filings, including this
registration statement, are also available to you without charge from the SEC
Web site, which is located at http://www.sec.gov.
- -43-
INDEX TO FINANCIAL STATEMENTS
Page
Report of Independent Accountants dated March 10, 2001 F-2
Consolidated Balance Sheets as of December 31, 2000 and 1999 F-3
Consolidated Statements of Operations, two years ended
December 31, 2000 F-4
Consolidated Statements of Cash Flows, two years ended
December 31, 2000 F-5
Consolidated Statements of Changes in Shareholders' Equity,
two years ended December 31, 2000 F-6
Notes to Consolidated Financial Statements F-7 - F-13
Consolidated Balance Sheets as of June 30, 2001
(unaudited) and December 31, 2000 (audited) F-14
Consolidated Statements of Operations for six months ended
June 30, 2001 (unaudited) and sixe months ended
June 30, 2000 (unaudited) F-15
Consolidated Statements of Cash Flows for six months ended
June 30, 2001 (unaudited) and six months ended
June 30, 2000 (unaudited) F-16
Notes to Consolidated Financial Statements
- -1-
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors
Science Dynamics Corporation
We have audited the accompanying consolidated balance sheets of Science
Dynamics Corporation and subsidiary as of December 31, 2000 and 1999 and the
related consolidated statements of operations, shareholders' equity and cash
flows for the years ended December 31, 2000 and 1999. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based
on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements.
An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material resects, the consolidated financial position
of Science Dynamics Corporation and Subsidiary as of December 31, 2000 and
1999 and the consolidated results of their operations and their cash flows
for the years then ended in conformity with generally accepted accounting
principles.
Peter C. Cosmas Co., CPAs
/s/Peter C. Cosmas Co., CPA's
- -----------------------------
370 Lexington Avenue
Suite 1205
New York, NY 10017
March 10, 2001
- -F2-
SCIENCE DYNAMICS CORPORATION AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
AS OF DECEMBER 31, 2000 AND 1999
ASSETS
December 31,
2000 1999
---- ----
Current assets:
Cash and cash equivalents $1,351,641 $ 674,793
Accounts receivable - trade 102,194 157,040
Accounts receivable - other 51,401 63,677
Inventories 87,623 361,039
Other current assets 84,566 50,185
---------- ---------
Total current assets 1,677,425 1,306,734
---------- ---------
Property and equipment, net 1,005,364 260,543
Deferred income taxes - 308,000
Intangible Assets, net of accumulated
amortization of $1,200,000 in 2000 and
$900,000 in 1999. 300,000 600,000
Other assets 25,363 133,776
---------- ---------
Total assets $3,008,152 $2,609,053
========== =========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Current portion of capital lease obligation $ 57,598 $ -
Accounts payable 358,820 215,409
Accrued expenses 118,059 424,677
---------- ---------
Total current liabilities 534,477 640,086
---------- ---------
Non current portion of capital lease obligation 128,413 -
---------- ---------
Total liabilities 662,890 640,086
Commitments
Shareholders' equity -
Common stock - .01 par value,
45,000,000 shares authorized,
17,783,700 and 17,286,278 issued
17,657,901 and 17,160,478 outstanding
in 2000 and 1999 respectively. 177,837 172,862
Additional paid-in capital 14,266,787 12,556,205
(Deficit) (11,701,529) (10,362,267)
---------- ---------
2,743,095 2,366,800
Common stock held in treasury,
at cost (397,833) (397,833)
---------- ---------
Total shareholders' equity 2,345,262 1,968,967
---------- ---------
Total liabilities and shareholders'
Equity $3,008,152 $2,609,053
========== =========
The accompanying notes are an integral part of these consolidated financial statements.
- -F3-
SCIENCE DYNAMICS CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31, 2000 AND 1999
2000 1999
---- ----
NET SALES $5,269,377 $2,347,984
---------- ----------
Operating costs and expenses:
Cost of sales 1,891,484 1,330,886
Research and development 1,141,656 1,331,521
Selling, general
and administrative 3,605,768 1,728,244
---------- ----------
6,638,908 4,390,651
---------- ----------
Operating Loss (1,369,531) (2,042,667)
Other income (expenses):
Interest income 40,647
Interest expense (10,378) (12,219)
---------- ----------
Net Loss $(1,339,262) $(2,054,886)
========== ==========
Net Loss per common share
basic and diluted $ (0.08) $ (0.12)
========== ==========
The accompanying notes are an integral part of these consolidated financial statements.
- -F4-
SCIENCE DYNAMICS CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31,2000 AND 1999
2000 1999
---- ----
Cash flows from operating activities:
Net Loss $(1,339,262) $(2,054,886)
----------- -----------
Adjustments to reconcile net loss to
net cash used for
operating activities:
Depreciation 159,859 94,101
Amortization of capitalized software - 138,996
Amortization of Intangible assets 300,000 300,000
Changes in operating assets and liabilities:
(Increase) decrease in:
Accounts receivable 54,846 109,363
Other receivable 12,276 596,223
Inventories 273,416 117,455
Other current assets (34,381) (3,919)
Other assets 108,413 7,642
Decrease in:
Accounts Payable and
accrued expenses (163,207) (179,900)
----------- -----------
Total adjustments 711,222 1,179,961
----------- -----------
Net cash used for
operating activities (628,040) (874,925)
----------- -----------
Cash flows from investing activities:
Purchase of property and equipment - net (704,246) (123,555)
----------- -----------
Net cash used in investing activities (704,246) (123,555)
----------- -----------
Cash flows from financing activities:
Increase (decrease) in:
Payment on loan payable - (100,000)
Payment on capitalized lease (14,423) -
Proceeds from sale of state income tax NOL 308,000 -
Issuance of common stock and warrants 1,715,557 1,741,024
----------- -----------
Net cash provided
by financing activities 2,009,134 1,641,024
----------- -----------
Net increase in
cash and cash equivalents 676,848 642,544
Cash and cash equivalents -
beginning of period 674,793 32,249
----------- -----------
Cash and cash equivalents -
end of period 1,351,641 674,793
=========== ===========
Noncash transactions:
Increase in Capital Lease Obligations $ 200,434 $ -
=========== ===========
The accompanying notes are an integral part of these consolidated financial statements.
- -F5-
SCIENCE DYNAMICS CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
FOR THE TWO YEARS ENDED DECEMBER 31, 2000 AND 1999
Common Stock Additional Treasury
------------ Paid-In --------
Shares Amount Capital (Deficit) Shares Amount
------ ------ ------- --------- ------ ------
Balance
December 31, 1998 15,861,449 $158,614 $ 10,729,429 $ (8,307,381) 125,800 $397,833
========== ======== ============ ============= ======= =======
Exercise of Stock Options 34,800 348 26,984 - - -
Issuance of common stock
net of related expenses 1,218,000 12,180 1,701,512 - - -
Common Stock issued
for patent 172,029 1,720 98,280
Net loss - - - (2,054,886) - -
Balance
December 31, 1999 17,286,278 $172,862 $ 12,556,205 $(10,362,267) 125,800 $397,833
========== ======== ============ ============= ======= =======
Exercise of Stock Options 283,673 2,838 151,069 - - -
Issuance of common stock
net of related expenses 213,749 2,137 1,559,513 - - -
Net loss - - - (1,339,262) - -
---------- -------- ------------ ------------- ------- -------
Balance
December 31, 2000 17,783,700 $177,837 $14,266,787 (11,701,529) 125,800 $397,833
========== ======== ============ ============= ======= =======
The accompanying notes are an integral part of these consolidated financial statements.
- -F6-
SCIENCE DYNAMICS CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Summary of Significant Accounting Policies:
a. Principles of Consolidation:
The consolidated financial statements include the Company's wholly
owned subsidiary. All intercompany transactions have been eliminated
in consolidation.
b. Organization and Description of Business:
The Company, which was incorporated in May 1973 and commenced operations
in July 1977, is engaged in the design, development, integration and
marketing of advanced telecommunications products and applications.
All the Company's operations are considered to be in one industry.
c. Use of Estimates:
The preparation of financial statements in conformity with generally
accepted accounting principles require management to make estimates
and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the
date of the financial statements and the reported amounts of revenues
and expenses during the reporting periods. Actual results could differ
from those estimated.
d. Inventories:
Inventories are stated at the lower of cost or market, with cost determined
on a first-in, first-out basis.
e. Property and Equipment:
Property and equipment are stated at cost, depreciation of property and
equipment is computed generally using the straight-line method based on
estimated useful lives of five years for machinery and equipment and
seven years for furniture and fixtures. Leasehold improvements are
amortized over the life of the related lease or their estimated useful
lives, whichever is shorter, using the straight-line method. Costs of
major additions and betterment's are capitalized; maintenance and repairs
which do not improve or extend the life of respective assets are charged
to expenses as incurred. When an asset is sold or otherwise disposed of,
the cost of the property and the related accumulated depreciation is
removed from the respective accounts and any resulting gains or losses
are reflected in income.
f. Cash and Cash Equivalents:
The Company considers all highly liquid debt instruments purchased with a
maturity of three months or less to be cash equivalents.
g. Income Taxes:
The Company elected to adopt the provisions of Statement of Financial
Accounting Standards (SFAS) No. 109 "Accounting for Income Taxes",
(SFAS No. 109) in 1992. Under SFAS No. 109, deferred income taxes are
recognized for the tax consequences in future years of differences between
the tax basis of assets and liabilities and their financial reporting
amounts at each year-end based on enacted tax laws and statutory tax
rates applicable to the periods in which the differences are expected to
affect taxable income. Valuation allowances are established when necessary
to reduce deferred tax assets to the amount expected to be realized.
Income tax expenses (credit) is the tax payable (receivable) for the period
and the change during the period in deferred tax assets and liabilities.
- -F7-
h. Revenue Recognition:
Revenue is generally recognized when all significant contractual
obligations have been satisfied and collection of the resulting
receivable is reasonably assured. Revenue from product sales is recognized
at time of delivery and acceptance and after consideration of all the terms
and conditions of the customers contract. Sales of services are recognized
at time of performance. The Company follows SOP 97-2, "Software Revenue
Recognition," as such the Company recognizes product revenue upon shipment
if a signed contract exists, the fee is fixed or determinable, collection of
resulting receivables is probable and product returns are reasonable
estimable.
i. Impairment of Long-Lived Assets:
Effective January 1, 1996, the Company adopted SFAS No. 121, "Accounting
for the Impairment of long-lived Assets and for long-lived Assets to be
Disposed of." SFAS No. 121 requires the Company to review the recoverability
of the carrying amounts of its long-lived assets whenever events or changes
in circumstances indicate that the carrying amount of the asset might not be
recoverable.
In the event that facts and circumstances indicate that the carrying amount
of long-lived assets may be impaired, an evaluation of recoverability
would be performed. If an evaluation is required, the estimated future
undiscounted cash flows associated with the asset would be compared to the
assets' carrying amount to determine if a write-down to fair value is
required. Fair value may be determined by reference to discounted future
cash flows over the remaining useful life of the related asset. In 2000,
the Company wrote off the carrying value of one of its patents in the amount
of $89,706.
j. Fair Value Disclosures:
The carrying amounts reported in the Consolidated Balance Sheets for cash
and cash equivalents, accounts receivable, accounts payable and accrued
expenses, approximate fair value because of the immediate or short-term
maturity of these financial instruments.
k. Stock Options:
The Company accounts for its stock options in accordance with the
provisions of Accounting Principles Board (APB) Opinion No. 25,
Accounting for Stock Issued to Employees, and related interpretations.
As such, compensation expense would be recorded on the date of grant
only if the current market price of the underlying stock exceeded the
exercise price. On January 1, 1996, the Company adopted the disclosure
requirements of SFAS No. 123, Accounting for Stock Based Compensation.
Had the company determined compensation cost based on fair value at the
grant date for stock options under SFAS No. 123 the effect would have
been immaterial.
l) New Accounting Pronouncements:
In June 1998, the Financial Accounting Standards Board ("FASB"), issued
SFAS No. 133, "Accounting for Derivative Instruments and Hedging
Activities" and in June 2000 issued SFAS No. 138, accounting for
certain Derivative Instruments and Certain Hedging Activities, an
amendment of SFAS No. 133. These new standards require companies to
record derivative financial instruments on the balance sheet as assets
or liabilities, measured at fair value. Gains or losses resulting from
changes in the fair value of those derivatives would be accounted for
based on the use of the derivative and whether the instrument qualified
for hedge accounting, as defined in SFAS 133 and 138. The Company is
required to implement these statements in the first quarter of fiscal 2001.
The company has not used derivative instruments and believes the impact of
adoption of this statement will not have a significant effect on the
financial statements.
- -F8-
In December 1999, the Securities and Exchange Commission ("SEC") issued
Staff Accounting Bulletin No. 101, "Revenue Recognition in Financial
Statements" ("SAB No. 101"), which provided guidance on the recognition,
presentation and disclosure of revenue in financial statements. SAB No. 101
did not impact the Company's revenue recognition policies.
In March 2000, the Financial Accounting Standards Board, released FASB
Interpretation No. 44, "Accounting for Certain Transactions involving
Stock Compensation, an interpretation of APB Opinion No. 25," which
provides clarification of Opinion No. 25 for certain issues, such as
the determination of who is an employee, the criteria for determining
whether a plan qualifies as a non-compensatory plan, the accounting
consequence of various modifications to the terms of a previously fixed
stock option or award, and the accounting for an exchange of stock
compensation awards in a business combination. The Company believes that
its practices are in conformity with this guidance, and therefore
Interpretation No. 44 will have no impact on its financial statements.
2 Accounts Receivable:
The Company evaluates its accounts receivable on a customer-by-customer
basis and has determined that no allowance for doubtful accounts is
necessary at December 31, 2000 and 1999.
3 Property and Equipment:
A summary of the major components of property and equipment is as
follows:
2000 1999
---- ----
Computer and software $ 889,923 $189,394
Leasehold improvements 204,150 -
Machinery and equipment 310,146 310,146
Furniture 48,235 48,235
Less accumulated
depreciation (447,090) (287,232)
Totals $1,005,364 $ 260,543
The computer and software includes $221,862 of capitalized software which
was related to contracted labor to provide SNMP, an additional feature, to
our 2308 Gateway series. SNMP is widely used in the industry and the project
was to integrate its functionality into our existing software using known
integration techniques. Detailed plans for the integration were provided by
the vendor and the requirement of technological feasibility as defined under
Financial Accounting Standard 86 was satisfied. The SNMP feature will be
included in all future shipments of the 2308 series and is being amortized
over 24 months. Amortization expense related to this capitalized software
will begin in 2002 as the new release containing the SNMP feature became
available in January.
4 Income Taxes:
In 1992, the Company adopted SFAS No. 109, Accounting for Income taxes.
Under the provision of SFAS No. 109, the Company elected not to restate
prior years due to immateriality. Inc. 1992, the effect of the change
was to decrease the net loss by $308,000 (.10 per share). The deferred
tax asset recognized in the accompanying balance sheet at
December 31, 1999 was recovered through the sale of New Jersey State
net-operating loss carryovers as permitted by the State in the amount
of $308,000.
At this time, the Company does not believe it can reliably predict
profitability for the long-term. Accordingly, the deferred tax asset
applicable to 2000 and 1999 operations has been reduced in its entirety
by the valuation allowance.
As a result of the operating losses for the years ended December 31, 1990
and 1992-2000 the Company has available to offset future taxable income
a net operating loss of $12,722,364 expiring 2005-2020. In addition,
research credits expiring 2005-2014 are available to offset future taxes.
- -F9-
The components of the provision (credit) for income taxes from continuing
operations is as follows:
2000 1999
----- ----
Deferred
Federal $ - $ -
Current
Federal - -
State - -
---------- ---------
$ - $ -
---------- ---------
Differences between the tax provision computed using the statutory federal
income tax rate and the effective income tax rate on operations is as follows:
2000 1999
---- ----
Federal
Statutory rate $(455,349) $(698,661)
Research tax
Credits - -
Tax benefit not
Provided due
To valuation
Allowance 455,349 698,661
------- -------
- -
======= =======
Components of the Company's deferred tax assets and liabilities are as
follows:
December 31,
2000 1999
---- ----
Deferred tax assets:
Tax benefits related
To net operating
Loss carry forwards
And research tax Credits $4,298,635 $3,843,286
Total deferred tax Asset 4,298,635 3,843,286
Valuation
Allowance for
Deferred tax
Assets 4,298,635 3,843,286
---------- ---------
Net deferred tax Assets $ -0- $ -0-
---------- ---------
- -F10-
5 Commitments:
a Leases
The Company leases their office, sales and manufacturing facilities and
certain vehicles under non-cancelable operating leases with varying terms.
The leases generally provide that the Company pay the taxes, maintenance and
insurance expenses related to the leased assets. Future minimum lease
payments required under operating leases that have initial or remaining
non-cancelable lease terms in excess of one year, as of December 31, 2000 are
as follows:
2001 $193,622
2002 185,483
2003 185,483
2004 183,052
2005 181,836
After 2005 60,612
Total minimum lease payments $990,088
--------
b Employment Agreement:
The Company has an employment agreement with one officer, who is also a
director of the company. The employment agreement contains change in control
provisions that would entitle the officer to receive up to 2.99 times the
annual salary if there is a change in control in the Company (as defined) and
a termination of employment. The maximum contingent liability under this
agreement in such event is approximately $523,250.
6 Intangible Assets:
On November 7, 1996, the Company acquired "Intellectual Property", issuing
1,500,000 shares of its common stock. Based on technical reviews of the
property and the business potential of the technology, the Company valued
the "Intellectual Property" at $1,500,000. The Company began amortizing
the property on January 1, 1997 over a period of five years. The
amortization for 2000 and 1999 was $300,000 for each year.
7 Stock Options and Warrants:
On November 17, 1999 the Company amended the Incentive Stock Option Plan,
authorizing an additional 1,088,000 shares, which increased the total
number of shares available under the Plan to 1,378,950. Options may be
granted under the Plan to employees and directors at no less than 100%
of the fair value on the date of grant. The options expire ten years
after the date of grant.
Changes in shares under the Plan were as follows:
Shares Weighted
Under Average
Option per Share
Balance January 1, 1999 177,500 $ 0.81
Options Granted 60,000 $ 0.50
Options Terminated
Options Exercised (34,800) $ 0.79
Balance December 31, 1999 202,700 $ 0.97
Options Granted 587,173 $ 3.83
Options Terminated (500) $ 7.62
Options Exercised (283,673) $ 0.54
Balance December 31, 2000 505,700 $ 4.76
The total amount of shares granted and not exercised at December 31, 2000
amount to 505,700 at exercise prices ranging from 0.50 to 10.75 per share.
The total amount of shares exercisable at the end of the year was 293,200
with a weighted average exercise price of $6.94. The weighted average
remaining contractual life of the options at the end of the year was
7 years.
- -F11-
As allowed by FASB No. 123, The Company has elected to continue to follow
Accounting Principles Board (APB) Opinion No. 23, " Accounting for Stock
Issued to Employees" (APB No. 25) in accounting for its stock option plans.
Under APB No. 25, the Company does not recognize compensation expense on the
issuance of its stock options because the options terms are fixed and the
exercise price equals the market price of the underlying stock on the grant
date.
As required by FASB No. 123, the Company has determined the pro-forma
information as if the Company had accounted for stock options granted since
January 1, 1996, under the fair value method of FASB No. 123. An option
pricing model similar to the Black-Sholes was used with the following weighted
average assumptions used for grants in the year 2000 and 1999, respectively:
expected volatility of 80 percent; risk free interest rate of 7% and 6%
respectively and expected lives of 5 years. The pro-forma effect of these
options on net earnings was not material. These pro-forma calculations only
include the effect of 1999 and 2000 grants. As such, the impacts are not
necessarily indicative of the effects on reported net income of future years.
8 Major Customers:
During 2000 two customers accounted for 83% and 15% of total sales. During
1999 three customers and their operating subsidiaries accounted for 64.63%,
10.31% and 9.71% of total sales.
9 Earnings (Loss) Per Share:
In February 1997, the Financial Accounting Standards Board issued SFAS No.
128. "Earnings Per Share" applicable for financial statements issued for
periods ending after December 15, 1997. As required the Company adopted SFAS
No. 128 for the year ended December 31, 1997 and restated all prior period
earnings per share figures. The Company has presented basic earnings per
share. Basic earnings per share excludes potential dilution and is calculated
by dividing income available to common stockholders by the weighted average
number of outstanding common shares. Diluted earnings per share incorporates
the potential dilutions from all potentially dilutive securities that would
have reduced earnings per share. Since the potential issuance of additional
shares would reduce loss per share they are considered anti-dilutive and are
excluded from the calculation.
The weighted average number of shares used to compute basic loss per share was
17,549,993 in 2000 and 16,777,070 in 1999.
10 Related Party Transactions
During 2000, Scidyn began the deployment of the Cascadent Supply Agreement,
this Agreement provided $4,370,520 in revenue for the year. The Agreement was
terminated on January 4, 2001, upon receiving official word that Cascadent
was placed into receivership. Alan Bashforth, one of Cascadent's principals,
is a member of the Company's Board of Directors.
11 Subsequent Events
In March 2001 the Company entered into a $40,000,000 Equity line of Credit
arrangement with the Alpha Group. Under the terms of the equity line
agreement, the Company will have the right to sell up to $40 million of its
common stock. The Company has sole discretion, subject to certain volume
limitations and conditions, to draw down upon such funds as its capital needs
dictate. The sale price of the common stock will not exceed ten percent of an
average closing bid price to be calculated at the time of each sale. In
connection with such financing Alpha has been issued warrants to purchase up
to 500,000 shares of the Company's common stock at exercise prices of $5.00
per share. Additional warrants to purchase up to 500,000 shares of the
Company's common stock at an exercise price equal to the current bid price
will be issued on a pro rata basis at the time of each sale. The term of the
equity line is for eight months with an automatic one-year extension if at
least ten percent or $4 million is drawn down during the initial eight-month
period.
On May 22, 2001, we issued $1,200,000 principal amount of 8% convertible
debentures, due May 22, 2003, to three investors pursuant to a Subscription
Agreement dated May 22, 2001. Interest only payments are due quarterly
commencing September 30, 2001, and the principal is due in one lump sum on
May 22, 2003, or upon certain events of default. The conversion price for
the convertible debentures is the lesser of 85% of the average of the three
lowest closing prices for the common stock for the 30 trading days prior to
but not including May 22, 2001, or 85% percent of the average of the three
lowest closing prices for the common stock for the 30 trading days prior to
but not including the conversion date. This embedded conversion feature was
valued at $212,523 and was recorded in the second quarter of 2001 as
interest expense per EITF 98-5. This was calculated by taking 85% of the
average of the three lowest closing prices in the thirty days preceding the
signing of the agreement and assumed that the entire $1,200,000 was
converted. The agreement does not have a waiting period for conversion, so
the entire amount was expensed in the period the Agreement was signed. The
maximum number of shares of common stock that any subscriber or group of
affiliated subscribers may own after conversion at any given time is 4.99%.
- -F12-
The equity financing draw downs are subject to a limit of 300 percent of the
"Average Daily Trading Volume", defined as the dollar amount of the average
daily trading volume of shares of the Company's common stock, calculated based
upon the average bid price and average daily trading volume traded over the
twenty trading days preceding multiple put dates. As such, SciDyn's ability
to access these funds in sufficient amounts will be directly related to the
average daily trading volume as defined. The agreement contains other
provisions, which may have the potential to limit SciDyn's ability to draw
down funds. The agreement can be accessed in its entirety as an exhibit to an
8-K filing made with the Securities and Exchange Commission.
Funding under the agreement is also subject to completion of certain terms and
conditions, including the filing of a registration statement with the
Securities and Exchange Commission. No public offering of the Company's
common stock will be made except by means of a prospectus under an effective
registration statement.
On May 21, 2001, an agreement was executed to cancel all provisions of the
$40,000,000 Equity Line of Credit arrangement with the Alpha Group. The
agreement with Alpha was a good deal in which all parties were ready to move
ahead. However, the Company had immediate capital requirements, which would
not be satisfied by the Alpha agreement. In particular, funds would only be
provided to the Company by Alpha after the effective date of a registration
statement. In order to obtain other financing, the Company was required to
cancel the Alpha deal. Alpha was contacted and agreed to cancel the
agreement, in exchange for a payment of $30,000 to Alpha to cover its
expenses. The 500,000 warrants that were issued to Alpha on March 2, 200l,
were terminated.
- -F13-
SCIENCE DYNAMICS CORPORATION AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
ASSETS
June 30, December 31,
2001 2000
(Unaudited) (Audited)
--------- ----------
Current assets:
Cash and cash equivalents $ 187,774 $ 1,351,641
Accounts receivable - trade 113,925 102,194
Accounts receivable - other 48,447 51,401
Inventories 78,640 87,623
Other current assets 67,562 84,566
--------- ----------
Total current assets 496,348 1,677,425
--------- ----------
Property and equipment, net 974,308 1,005,364
Intangible Assets, net of accumulated
amortization of $1,350,000 in 2001 and
$1,200,000 in 2000. 150,000 300,000
Other assets 25,363 25,363
--------- ----------
Total assets $1,646,019 $ 3,008,152
========= ==========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Current portion of capital lease obligation $ 63,322 $ 57,598
Accounts payable 490,062 358,820
Accrued expenses 161,646 118,059
--------- ----------
Total current liabilities 715,030 534,477
--------- ----------
Convertible Notes 1,200,000 -
Non Current portion of capital lease obligation 90,422 128,413
--------- ----------
Total liabilities 2,005,452 662,890
Commitments
Shareholders' equity -
Common stock - .01 par value,
45,000,000 shares authorized,
17,783,701 issued and 17,657,901 outstanding
in 2001 and 2000 respectively. 177,837 177,837
Additional paid-in capital 14,298,021 14,266,787
(Deficit) (14,437,458) (11,701,529)
---------- ----------
38,400 2,743,095
Common stock held in treasury, at cost (397,833) (397,833)
---------- ----------
Total shareholders' (deficit)/ equity (359,433) 2,345,262
---------- ----------
Total liabilities and shareholders' equity $ 1,646,019 $ 3,008,152
========== ==========
- -F14-
SCIENCE DYNAMICS CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
---------
Six Months Ended June 30, Three Months Ended June 30,
2001 2000 2001 2000
---- ---- ---- ----
NET SALES $ 372,614 $3,547,753 $ 178,501 $2,104,271
---------- ---------- ---------- ---------
Operating costs and expenses:
Cost of sales 288,526 1,284,270 151,679 712,227
Research and development 754,790 526,534 334,268 270,826
Selling, general
and administrative 1,839,340 1,408,305 983,123 803,039
---------- ---------- ---------- ---------
2,882,656 3,219,109 1,424,070 1,786,092
---------- ---------- ---------- ---------
Operating (loss) income (2,510,042) 328,644 (1,245,569) 318,179
Other (expenses):
Interest income 4,638 8,438 4,638 5,540
Interest expense (230,524) - (230,524) -
---------- ---------- ---------- ---------
Net (loss) income $(2,735,928) $ 337,082 $(1,471,455) $ 323,719
========== ========== ========== =========
Net loss per common share and net
income per share-basic and diluted $ (0.15) $ 0.02 $ (0.08) $ 0.02
========== ========== ========== =========
- -F15-
SCIENCE DYNAMICS CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
---------
Six Months Ended June 30,
2001 2000
---- ----
Cash flows from operating activities:
Net (loss)Income $(2,735,928) $ 337,082
----------- ----------
Adjustments to reconcile net (loss)income to
net cash used for
operating activities:
Depreciation 140,231 59,880
Amortization of
Intangible assets 150,000 150,000
Interest expense 212,524 -
Changes in operating assets
and liabilities:
(Increase) decrease in:
Accounts receivable (11,731) (1,413,777)
Other receivable 2,954 1,962
Inventories 8,983 (31,536)
Other current assets 17,004 (79,065)
Other assets - 3,821
Increase (decrease) in:
Accounts Payable and
accrued expenses 174,829 8,701
----------- ----------
Total adjustments 694,794 (1,300,014)
----------- ----------
Net cash used for operating activities (2,041,134) (962,932)
----------- ----------
Cash flows from investing activities:
Purchase of property and equipment - net (109,176) (305,384)
----------- ----------
Net cash used in investing activities (109,176) (305,384)
----------- ----------
Cash flows from financing
activities:
Increase (decrease) in
Issuance of Convertible debt, net 1,018,710 -
Payment on capitalized leases (32,267) -
Issuance of common stock and warrants - 1,724,057
----------- ----------
Net cash provided
by financing activities 986,443 1,724,057
----------- ----------
Net (decrease) increase in
cash and cash equivalents (1,163,867) 455,741
Cash and cash equivalents -
beginning of period 1,351,641 674,793
----------- ----------
Cash and cash equivalents -
end of period $ 187,774 $1,130,534
=========== ==========
- -F16-
SCIENCE DYNAMICS CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
PART I
Item 1. (continued)
Basis of Presentation
---------------------
The unaudited financial statements included in the Form 10-QSB have
been prepared in accordance with generally accepted accounting
principles for interim financial information and with the
instructions to Form 10-QSB and Item 310(b) of Regulation SB. The
financial information furnished herein reflects all adjustments,
which in the opinion of management are necessary for a fair
presentation of the Company's financial position, the results of
operations and the cash flows for the periods presented.
Certain information and footnote disclosures, normally included in
financial statements prepared in accordance with generally accepted
accounting principles, have been condensed, or omitted, pursuant to
such rules and regulations.
These interim statements should be read in conjunction with the
audited financial statements and notes thereto included in the
Company's Annual Report on Form 10-KSB for the fiscal year ended
December 31, 2000. The Company presumes that users of the interim
financial information herein have read or have access to the
audited financial statements for the preceding fiscal year and that
the adequacy of additional disclosure needed for a fair
presentation may be determined in that context. The results of
operations for any interim period are not necessarily indicative of
the results for the full year.
Income per share
- ----------------
Per-share data has been computed on the basis of the weighted
average number of shares of common stock outstanding during the
period. Common equivalent shares, including warrants and stock
options, are included in the calculation of diluted earnings per
common and common equivalent shares to the extent that they are
dilutive and excluded to the extent they are anti-dilutive.
- -F17-
We have not authorized any dealer, salesperson or other person to give
any information or represent anything not contained in this prospectus.
You must not rely on any unauthorized information or representations.
This prospectus is an offer to sell only the shares offered hereby,
but only under circumstances and in jurisdictions where it is lawful
to do so. The information contained in this prospectus is current only
as of its date.
______________
TABLE OF CONTENTS
Page
Prospectus Summary 4
Risk Factors 7
Use of Proceeds 12
Dividend Policy 13
Capitalization 14
Dilution 15
Selected Financial
Information 16
Management's Discussion
and Analysis of Financial
Condition and Results of
Operations 17
Business 21
Management 29
Certain Transactions 36
Principal Security
Holders 37
Description of
Securities 39
Selling Shareholder 40
Plan of Distribution 41
Legal Matters 42
Experts 42
How to Get More
Information 42
Financial Statements 43
______________
Until , 2001, 25 days after the date of this prospectus, all dealers
that buy, sell or trade these securities, whether or not participating in this
offering, may be required to deliver a prospectus. This is in addition to the
dealers' obligation to deliver a prospectus when acting as underwriters and
with respect to their unsold allotments or subscriptions.
______________
3,813,903 Shares
Common Stock
______________
______________
Prospectus
______________
Science Dynamics Corporation
, 2001
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 24. INDEMNIFICATION AND LIMITATION OF LIABILITY OF MANAGEMENT
As permitted by the Delaware General Corporation Law, we have
included in our Certificate of Incorporation a provision to eliminate
the personal liability of it's directors for monetary damages for breach or
alleged breach of their fiduciary duties as directors, subject to certain
exceptions. In addition, our Bylaws require us to (i) indemnify the
officers and directors under certain circumstances, including those
circumstances in which indemnification would otherwise be discretionary,
and (ii) advance expenses to the officers and directors as incurred in
connection with proceedings against them for which they may be indemnified.
We have entered into indemnification agreements with the officers and
directors containing provisions that are in some respects broader than
the specific indemnification provisions contained in the Delaware General
Corporation Law. The indemnification agreements may require the companies,
among other things, to indemnify such officers and directors against certain
liabilities that may arise by reason of their status or service as
directors or officers (other than liabilities arising from willful
misconduct of a culpable nature), to advance expenses incurred as a result
of any proceeding against them as to which they may be indemnified, and
to obtain directors' and officers' insurance if available on reasonable
terms. We believe that these charter provisions and indemnification
agreements are necessary to attract and retain qualified persons as
directors and officers.
We understand that the staff of the Securities and Exchange
Commission is of the opinion that statutory, charter and contractual
provisions as are described above have no effect on claims arising under
the federal securities laws.
ITEM 25. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
The following table sets forth the various expenses in connection with the
sale and distribution of the securities being registered. All of the amounts
shown are estimates except the Securities and Exchange Commission registration
fee.
- ------------------------------------------------------------------
SEC Registration Fee $773
Accounting Fees and Expenses $2,500
Printing and Engraving $2,000
Legal Fees and Expenses $35,000
Blue Sky Fees and Expenses $2,500
Miscellaneous Expenses $2,227
Total $45,000
II-1
ITEM 26. RECENT SALES OF UNREGISTERED SECURITIES
The following information sets forth certain information for
all securities of the Science Dynamics Corporation, sold during the past three
years without registration under the Securities Act of 1933 (the
"Securities Act"). The following pertains to each of the transactions:
- There were no underwriters involved in any of the transactions.
- All of the securities issued were restricted common stock, and each
of the certificates issued was stamped with the following restrictive legend:
"The shares represented by this certificate have not been registered under the
Securities Act of 1933. The shares have been acquired for investment and may
not be sold, transferred or assigned in the absence of an effective
registration statement for these shares under the Securities Act of 1933 or an
opinion of the Company's counsel that registration is not required under such
Act."
- No form of advertising or general solicitation was utilized in
connection with any of the offers or sales of such securities.
- Redistribution of the common stock was subject to the provisions of
Rule 144 of the Securities Act.
- Each of the offerees either had access to the information or were
furnished with the Registrant's latest Form 10-KSB, Form 10-QSB's for the
fiscal periods subsequent to the end of the fiscal period, and all forms 8-K
filed by the Registrant since the end of the fiscal period.
- Each of the purchasers represented that the purchaser was acquiring
the securities for the purchaser's own account, for investment only, and not
with a view toward the resale, fractionalization, division or distribution
thereof, and further, the investors each represented that they had no present
plans to enter into any contract, undertaking, agreement, or arrangement for
any such resale, distribution, division or fractionalization thereof.
In December 1998, we sold 1,200,000 shares of our common stock for an
aggregate consideration of $600,000 to three accredited investors pursuant to
an offering in reliance upon the exemption provided by Rule 506 of Regulation
D of the Securities Act.
In March 1999, we acquired a patent for the "Error Detection and
Correction System for Use with Address Translation Memory Controller" in
exchange for an aggregate of 172,029 shares of common stock valued at $100,000
issued to three shareholders of Gorca Memory Systems, Inc. Such shares were
issued in reliance upon Section 4(2) of the Securities Act.
During the period from May 20, 1999 through Dec. 21st 1999 we sold
1,178,000 shares of our common stock for an aggregate consideration of
$1,843,000 to six accredited investors pursuant to an offering in reliance
upon the exemption provided by Rule 506 of Regulation D of the Securities Act.
During the period from May 12, 2000 through July 17, 2000, we sold
200,650 shares of our common stock for an aggregate consideration of
$1,705,525 to eight accredited investors pursuant to an offering in reliance
upon the exemption provided by Rule 506 of Regulation D of the Securities Act.
On May 22, 2001, we issued an aggregate of $1,200,000 of convertible
notes and warrants to purchase 872,727 shares of common stock to three
investors. The offering of such securities was made to accredited investors
in reliance upon the exemption provided by Rule 506 of Regulation D of the
Securities Act of 1933.
II-2
ITEM 27. EXHIBITS
3.1(1) The Articles of Incorporation dated 5/23/73, and amendments
dated 10/31/80 and 11/25/80
3.1.1(5) Amendment to Articles of Incorporation dated 5/23/84
3.1.2(5) Amendment to Articles of Incorporation dated 7/13/87
3.1.3(5) Amendment to Articles of Incorporation dated 11/8/96
3.1.4(5) Amendment to Articles of Incorporation dated 12/15/98
3.2(1) By-Laws
5.1(2) Opinion of Sichenzia, Ross, Friedman & Ference LLP
10.01(3) 1992 Incentive Stock Option Plan of the Registrant
10.02(4) Note - Laurus Master Fund, Ltd. (filed as exhibit 10.06 to
Form 8-K)
10.03(4) Note - The Keshet Fund, L.P. (filed as exhibit 10.07 to
Form 8-K)
10.04(4) Note - Keshet L.P. (filed as exhibit 10.08 to Form 8-K)
10.05(4) Warrant - Laurus Master Fund, Ltd. (filed as exhibit
10.09 to Form 8-K)
10.06(4) Warrant - The Keshet Fund, L.P. (filed as exhibit 10.10 to
Form 8-K)
10.07(4) Warrant - Keshet, L.P. (filed as exhibit 10.11 to Form 8-K)
10.08(4) Subscription Agreement re Laurus Funding (filed as exhibit
10.12 to Form 8-K)
10.09(4) Security Agreement re Laurus Funding (Filed as exhibit 10.13
to Form 8-K)
10.10(5) Employment Agreement between Registrant and Joy C. Hartman,
President & CEO
10.11(5) Lease Agreement between Registrant and Cherry Hill Industrial
Sites, Inc. dated August 8, 1990
10.12(5) Lease Modification and Extension Agreement between Registrant
and Cherry Hill Industrial Sites, Inc. dated March 28, 1995
10.13(5) Sublease between Registrant and Pro Circuits, Inc. dated
June 4, 1998
10.14(2) agreement between the Registrant and @IPbell Inc, dated
february 11, 2000
23.1(2) Consent of Peter C. Cosmas, CPA's
23.2(2) Consent of Sichenzia, Ross, Friedman & Ference LLP (included
in Exhibit 5.1)
23.3(5) Consent of Synergy Research Group, Inc.
24.1(2) Power of Attorney (see page II-5)
(1) Filed as like-numbered exhibits to Registration Statement,
Form S-18, File Number 33-20687, effective April 21, 1981,
incorporated by reference.
(2) Filed herewith
(3) Incorporated by reference from the Registrant's Quarterly Report
on Form 10-QSB for the three months ended March 31, 1996).
(4) Incorporated by reference from the Registrant's Form 8-K filed
May 24, 2001.
(5) Previously filed herewith.
ITEM 28. UNDERTAKING
A. Undertaking Pursuant to Rule 415
The undersigned Registrant hereby undertakes: (1) To file, during any
period in which offers or sales are being made, a post-effective amendment
to this Registration Statement: (i) to include any prospectus required by
Section 10(a)(3) Securities Act of 1933 (the "Securities Act"); (ii) to
reflect in the prospectus any facts or events arising after the
effective date of the Registration Statement (or the most recent
post-effective amendment thereof) which, individually or in the aggregate,
II-3
represent a fundamental change in the information set forth in the
Registration Statement. Notwithstanding the foregoing, any increase or
decrease in volume of securities offered (if the total dollar value of
securities offered would not exceed that which was registered) and any
deviation from the low or high end of the estimated maximum offering range
may be reflected in the form of prospectus filed with the SEC pursuant to
Rule 424(b) if, in the aggregate, the changes in volume and price represent
no more than a 20% change in the maximum aggregate offering price set forth
in the "Calculation of Registration Fee" table in the effective
Registration Statement; (iii) to include any material information with
respect to the plan of distribution not previously disclosed in the
Registration Statement or any material change to such information in
the Registration Statement; (2) That, for the purpose of determining any
liability under the Securities Act, each such post-effective amendment
shall be deemed to be a new registration statement relating to the
securities offered therein, and the offering of such securities at that
time shall be deemed to be the initial bona fide offering thereof; (3)
To remove from registration by means of a post-effective amendment any
of the securities being registered that remain unsold at the termination
of this offering.
B. Undertaking In Respect of Indemnification
Insofar as indemnification for liabilities arising under the Securities
Act may be permitted to directors, officers and controlling persons of
the Registrant pursuant to the foregoing provisions, or otherwise, the
Registrant has been advised that in the opinion of the SEC such
indemnification is against public policy as expressed in the
Securities Act and is, therefore, unenforceable. In the event that a
claim for indemnification against such liabilities (other than the
payment by the Registrant of expenses incurred or paid by a director,
officer or controlling person of the Registrant in the successful defense
of any action, suit or proceeding) is asserted by such director,
officer or controlling person in connection with the securities being
registered, the Registrant will, unless in the opinion of its counsel the
matter has been settled by controlling precedent, submit to a court of
appropriate jurisdiction the question whether such indemnification by it is
against public policy as expressed in the Securities Act and will be
governed by the final adjudication of such issue.
C. Undertaking Pursuant to Rule 430A
The undersigned Registrant hereby undertakes that: (1) For purposes of
determining any liability under the Securities Act, the information omitted
from the form of the prospectus filed as part of this Registration
Statement in reliance upon Rule 430A and contained in a form of
prospectus filed by the Registrant pursuant to Rule 424(b)(1) or (4) or
497(h) under the Securities Act shall be deemed to be part of this
Registration Statement as of the time it was declared effective. (2) For the
purposes of determining any liability under the Securities Act, each
post-effective amendment that contains a form of prospectus shall be deemed to
be a new registration statement relating to the securities offered
therein, and the offering of such securities at that time shall be deemed
to be the initial bona fide offering thereof.
II-4
SIGNATURES
In accordance with the requirements of the Securities Act of 1933,
the registrant certifies that it has reasonable grounds to believe that it
meets all the requirements of filing on Form SB-2 and authorized this
registration statement to be signed on its behalf by the undersigned, in the
City of Cherry Hill, State of New Jersey, on September 4, 2001.
SCIENCE DYNAMICS CORPORATION
/s/ JOY C. HARTMAN
Joy C. Hartman
President and Chief Executive Officer
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, the undersigned hereby constitute and
appoint Joy C. Hartman and Robert O'Connor, and each of them, his true and
lawful attorney-in-fact and agent, each with full power of substitution and
resubstitution, for him and in his name, place and stead, in any and all
capacities, to sign any and all amendments (including post-effective
amendments) to this Registration Statement, or any related registration
statement filed pursuant to Rule 462(b) under the Securities Act of 1933, and
to file the same, with exhibits thereto, and other documents in connection
therewith, with the Securities and Exchange Commission, granting unto said
attorneys-in-fact and agents, and each of them, full power and authority to do
and perform each and every act and thing requisite or necessary to be done in
connection therewith, as fully to all intents and purposes as he might or
could do in person, hereby ratifying and confirming all that each of said
attorneys-in-fact and agents, or his substitute or substitutes, may lawfully
do or cause to be done by virtue hereof.
II-5
In accordance with the requirements of the Securities Act of 1933,
this registration statement was signed by the following persons in the
capacities and on the dates stated.
Signature Title Date
--------- ----- ----
BY: /s/ Sheldon C. Hofferman Chairman of the Board September 4, 2001
------------------------
Sheldon C. Hofferman
BY: /s/ Joy C. Hartman President, CEO September 4, 2001
------------------------
Joy C. Hartman
BY: /s/ Alan C. Bashforth Director September 4, 2001
------------------------
Alan C. Bashforth
BY: /s/Kenneth P. Ray Director September 4, 2001
------------------------
Kenneth P. Ray
BY: /s/ L. Michael Hone Director September 4, 2001
------------------------
L. Michael Hone
BY: /s/ John Innes Director September 4, 2001
------------------------
John Innes
BY: /s/ Louis Padulo Director September 4, 2001
------------------------
Louis Padulo
BY: /s/ Robert O'Connor Vice President of September 4, 2001
------------------------ Finance and
Robert O'Connor Administration and Chief
Financial Officer
(Principal Accounting
Officer)
INDEX TO EXHIBITS
3.1(1) The Articles of Incorporation dated 5/23/73, and amendments
dated 10/31/80 and 11/25/80
3.1.1(5) Amendment to Articles of Incorporation dated 5/23/84
3.1.2(5) Amendment to Articles of Incorporation dated 7/13/87
3.1.3(5) Amendment to Articles of Incorporation dated 11/8/96
3.1.4(5) Amendment to Articles of Incorporation dated 12/15/98
3.2(1) By-Laws
5.1(2) Opinion of Sichenzia, Ross, Friedman & Ference LLP
10.01(3) 1992 Incentive Stock Option Plan of the Registrant
10.02(4) Note - Laurus Master Fund, Ltd. (filed as exhibit 10.06 to
Form 8-K)
10.03(4) Note - The Keshet Fund, L.P. (filed as exhibit 10.07 to
Form 8-K)
10.04(4) Note - Keshet L.P. (filed as exhibit 10.08 to Form 8-K)
10.05(4) Warrant - Laurus Master Fund, Ltd. (filed as exhibit
10.09 to Form 8-K)
10.06(4) Warrant - The Keshet Fund, L.P. (filed as exhibit 10.10 to
Form 8-K)
10.07(4) Warrant - Keshet, L.P. (filed as exhibit 10.11 to Form 8-K)
10.08(4) Subscription Agreement re Laurus Funding (filed as exhibit
10.12 to Form 8-K)
10.09(4) Security Agreement re Laurus Funding (Filed as exhibit 10.13
to Form 8-K)
10.10(5) Employment Agreement between Registrant and Joy C. Hartman,
President & CEO
10.11(5) Lease Agreement between Registrant and Cherry Hill Industrial
Sites, Inc. dated August 8, 1990
10.12(5) Lease Modification and Extension Agreement between Registrant
and Cherry Hill Industrial Sites, Inc. dated March 28, 1995
10.13(5) Sublease between Registrant and Pro Circuits, Inc. dated
June 4, 1998
10.14(2) agreement between the Registrant and @IPbell Inc, dated
february 11, 2000
23.1(2) Consent of Peter C. Cosmas, CPA's
23.2(2) Consent of Sichenzia, Ross, Friedman & Ference LLP (included
in Exhibit 5.1)
23.3(5) Consent of Synergy Research Group, Inc.
24.1(2) Power of Attorney (see page II-5)
(1) Filed as like-numbered exhibits to Registration Statement,
Form S-18, File Number 33-20687, effective April 21, 1981,
incorporated by reference.
(2) Filed herewith
(3) Incorporated by reference from the Registrant's Quarterly Report
on Form 10-QSB for the three months ended March 31, 1996).
(4) Incorporated by reference from the Registrant's Form 8-K filed
May 24, 2001.
(5) Previously filed herewith.